# Present Value Interest Factor Of Annuity - PVIFA

## What is the 'Present Value Interest Factor Of Annuity - PVIFA'

The present value interest factor of annuity (PVIFA) is a factor which can be used to calculate the present value of a series of annuities. The initial deposit earns interest at the periodic rate (r), which perfectly finances a series of (N) consecutive dollar withdrawals and may be written as the following formula:

PVIFA = (1 - (1 + r)^-N)/r

PVIFA is also a variable used when calculating the present value of an ordinary annuity.

Next Up

## BREAKING DOWN 'Present Value Interest Factor Of Annuity - PVIFA'

The calculation of PVIFA is based around the concept of the time value of money. This idea stipulates that the value of currency received today is worth more than the value of currency received at a future date. This is because the currency received today may be invested and generate interest.

## PVIFA Tables

The most common values of both N and r can be found in a PVIFA table, which immediately shows the value of PVIFA. This table is a particularly useful tool for comparing different scenarios with variable N and r values. The rate is displayed across the top row of the table while the number of periods is displayed in the first column. The cell in the PVIFA table that corresponds to the appropriate row and column indicates the present value factor. This factor is multiplied against the dollar amount in question to arrive at the present value. The major drawback of a present value interest factor table is the necessity to round calculated figures which sacrifices precision.

## The Usefulness of the Present Value Interest Factor of an Annuity

The present value interest factor of an annuity is useful in the determination of whether to take a lump sum payment now or accept an annuity payment in future periods. Using estimated rates of return, the value of the annuity payments may be compared to the lump sum. The present value interest factor may only be calculated if the annuity payments are for a predetermined amount spanning a predetermined range of time.

## Use of the Discount Rate

The discount rate used in the present value interest factor calculation approximates the expected rate of return for future periods. It is adjusted for risk based on the duration of the annuity payments and the investment vehicle utilized. Higher interest rates result in lower net present value calculations. This is because the value of \$1 today is diminished if future high returns are anticipated.

## Present Value Interest Factor of Annuity Due

If annuity payments are due at the beginning of the period, the series of payments are referred to as an annuity due. To calculate the present value interest factor of an annuity due, take the calculation of the present value interest factor and multiply it by (1+r), with the variable being the discount rate.

RELATED TERMS
1. ### Annuity Table

A method for determining the present value of a structured series ...
2. ### Present Value Of An Annuity

The current value of a set of cash flows in the future, given ...
3. ### Annuity Due

An annuity whose payment is to be made immediately, rather than ...
4. ### Ordinary Annuity

A series of equal payments made at the end of each period over ...
5. ### Future Value Of An Annuity

The value of a group of payments at a specified date in the future. ...
6. ### Delayed Annuity

An annuity in which the first payment is paid at a later date ...
Related Articles
1. Markets

### Present Value Interest Factor of Annuity (PVIFA)

PVIFA can be used to calculate the present value of a series of annuities by considering cash flows and depreciation.
2. Managing Wealth

### How to Calculate the Value of Annuities

Here's everything you need to account for when calculating the present and future value of annuities.
3. Markets

### Calculating the Present Value of an Annuity

The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate.
4. Retirement

### Are Annuities Retirement-Only Investments?

Learn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
5. Markets

### What's an Ordinary Annuity?

An ordinary annuity is a series of equal payments made at the end of each period over a fixed amount of time.
6. Retirement

### How a Fixed Annuity Works After Retirement

These popular investments can provide a steady stream of income during your retirement years. Here are the details.
7. Retirement

### How a Variable Annuity Works After Retirement

These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.

### Calculating Present Value Interest Factor

The present value interest factor is a number that makes it easier to calculate the present value of a payment or value to be received in the future.
9. Retirement

### Buying Annuities in a Low Interest Rate World

Learn if buying an annuity makes sense in a low interest rate environment. Also discover the different types of annuities and how interest rates affect them.
10. Retirement

### Are Annuities Right for You?

Annuities are safe and often appealing, but IRAs and 401(k)s offer advantages that annuities typically can’t match, with little additional risk.
RELATED FAQS
1. ### Why would I need to calculate the present value of an annuity?

Find out what information is needed to calculate the present value of an annuity, including an example of the present value ... Read Answer >>
2. ### What is the difference between the present value of an annuity and the future value ...

Find out about the difference between the future value and present value of a fixed annuity, including how to use these calculations ... Read Answer >>
3. ### For what types of financial instruments would I want to calculate the present value ...

Learn about the types of financial instruments the present value of an annuity calculation is most useful for, including ... Read Answer >>
4. ### What exact information is included in the interest rate when calculating the present ...

Find out what the interest rate of an annuity means in the context of the present value calculation, including an explanation ... Read Answer >>
5. ### How do you calculate a present value of annuity using Excel?

Find out how to use Microsoft Excel to calculate the present value of a fixed annuity, including proper setup and an example ... Read Answer >>
6. ### How do I calculate the future value of an annuity?

Find out how to calculate the future value of an ordinary annuity or an annuity due, including how the power of compounding ... Read Answer >>
Hot Definitions
1. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
2. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
3. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...
4. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
5. ### Brazil, Russia, India And China - BRIC

An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
6. ### Brexit

The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...