What is the Present Value Interest Factor - PVIF
The present value interest factor (PVIF) is a factor that is used to simplify the calculation for determining the present value of a sum of money to be received at some future point in time. PVIFs are often presented in the form of a table with values for different time periods and interest rate combinations.
Present Value Interest Factor
BREAKING DOWN Present Value Interest Factor - PVIF
The present value interest factor is based on the foundational financial concept of the time value of money. Accordingly, money today is worth more than an identical sum in the future, because of money's potential to grow in value over a given period of time. Provided money can earn interest, any amount of money is worth more the sooner it is received.
The formula for calculating the present value interest factor is as follows:
PVIF = a / (1 + r) ^ n
The "a" represents the future sum to be received, "r" represents the discount interest rate, and "n" represents the number of years or other time period.
PVIF Calculation and PVIF Tables
Here is an example of how to use the PVIF to calculate the present value of a future sum: Assume an individual is going to receive $10,000 five years from now, and that the current discount interest rate is 5%. Using the formula for calculating the PVIF, the calculation would be $10,000 / (1 + .05) ^ 5. The resulting PVIF figure from the calculation is $1904.76.
The present value of the future sum is then determined by subtracting the PVIF figure from the total future sum to be received. Thus, the present value of the $10,000 to be received five years in the future would be $10,000 - $1904.76 = $8,095.24.
PVIF tables often provide a fractional number to multiply a specified future sum by using the formula 1 / (1 +r) ^ n, which yields the PVIF for one dollar. Then the present value of any future dollar amount can be figured by multiplying any specified amount by the inverse of the PVIF number.