Present Value Interest Factor (PVIF)
What Is the Present Value Interest Factor (PVIF)?
The current value interest factor (PVIF) is a formula used to estimate the current worth of a sum of money that will be received sometime not too far off. PVIFs are in many cases given as a table values for various time spans and interest rate blends.
The Formula for the Present Value Interest Factor Is
Figuring out the PVIF
The current value interest factor depends on the key financial concept of the time value of money. That is, a sum of money today is worth more than a similar sum will be from here on out, in light of the fact that money can possibly fill in value over a given period of time. If money can earn interest, any amount of money is worth more the sooner it is received.
Present value interest factors are much of the time utilized in examining annuities. The current value interest factor of an annuity (PVIFA) is helpful while choosing whether to take a lump-sum payment now or acknowledge an annuity payment in later periods. Utilizing estimated rates of return, you can compare the value of the annuity payments to the lump sum.
The current value interest factor may possibly be calculated on the off chance that the annuity payments are for a foreordained amount traversing a foreordained scope of time.
Illustration of the PVIF
Here is an illustration of how to utilize the PVIF to work out the current value of a future sum: Assume an individual will receive $10,000 a long time from now, and that the current discount interest rate is 5%. Involving the formula for computing the PVIF, the calculation would be $10,000/(1 + .05) ^ 5. The subsequent PVIF figure from the calculation is $7,835.26.
The current value representing things to come sum not entirely set in stone by deducting the PVIF figure from the total future sum to be received. In this manner, the current value of the $10,000 to be received five years in the future would be $10,000 - $7,835.26 = $2,164.74.
A PVIF must be calculated for an annuity payment in the event that the payment is for a foreordained amount and a foreordained period of time.
PVIF tables frequently give a fractional number to duplicate a predetermined future sum by utilizing the formula above, which yields the PVIF for one dollar. Then the current value of any future dollar amount can be figured just barely by the inverse of the PVIF number.
Features
- Present value interest factors (PVIFs) are utilized to improve on a calculation of the time-value of a sum of money to be paid from now on.
- Present value interest factors are ordinarily utilized in dissecting annuities.
- Present value interest factors are accessible in table form for reference.
