What Is the Present Value Interest Factor – PVIF?
The present value interest factor (PVIF) is a tool 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.
The Formula for the Present Value Impact Factor Is
PVIF=(1+r)nawhere:∙a represents the future sum to be received.∙r represents the discount interest rate.
Present Value Interest Factor
What Does the Present Value Interest Factor Tell You?
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.
Present value impact factors are often used in analyzing annuities. The present value interest factor of an annuity (PVIFA) is useful when deciding whether to take a lump-sum payment now or accept an annuity payment in future periods. Using estimated rates of return, you can compare the value of the annuity payments 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.
- Present value impact factors (PVIFs) are a tool used to simplify time-value of money calculations for discounting future values to the present.
- Present value impact factors are often used in analyzing annuities.
- Present value interest factors are often available for look-up in table form.
Example of the Present Value Impact Factor 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 $7,835.26.
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 - $7,835.26 = $2,164.74.
PVIF tables often provide a fractional number to multiply a specified future sum by using the formula above, 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.