Present Value Interest Factor of an Annuity (PVIFA)
What Is the Present Value Interest Factor of an Annuity?
The current value interest factor of a annuity is a factor that can be utilized to work out the present value of a series of annuities when it is duplicated by the recurring payment amount. The initial deposit procures interest at the interest rate (r), which impeccably finances a series of (n) successive withdrawals and might be written as the accompanying formula:
- PVIFA = (1 - (1 + r)^-n)/r
PVIFA is likewise a variable utilized while computing the current value of a ordinary annuity.
Understanding Present Value Interest Factor of Annuity
The calculation of PVIFA depends on the concept of the time value of money. This thought specifies that the value of currency received today is worth more than the value of currency received sometime not too far off. This is on the grounds that the currency received today might be invested and can be utilized to generate interest.
Present Value Interest Factor of an Annuity, With Tables
The most common values of both n and r can be found in a PVIFA table, which promptly shows the value of PVIFA. This table is an especially helpful instrument for contrasting various situations and variable n and r values. The rate is shown across the table's top line, while the main column shows the quantity of periods.
The cell in the PVIFA table that relates to the suitable line and column demonstrates the current value factor. This factor is duplicated against the dollar amount of the recurring payment (annuity payment) being referred to show up at the current value. The major drawback of a current value interest factor table is the necessity to round calculated figures, which penances accuracy.
The Usefulness of the Present Value Interest Factor of Annuity
The current value interest factor of an annuity is helpful while deciding if 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 in the event that the annuity payments are for a foreordained amount traversing a foreordained scope of time.
Utilizing the Discount Rate for the Present Value Interest Factor
The discount rate utilized in the current value interest factor calculation approximates the expected rate of return for future periods. It is adjusted for risk in view of the duration of the annuity payments and the investment vehicle used. Higher interest rates bring about lower net present value calculations. This is on the grounds that the value of $1 today is decreased assuming high returns are anticipated from here on out.
Present Value Interest Factor of Annuity Due
In the event that annuity payments are due toward the beginning of the period, the payments are alluded to as a annuity due. To ascertain the current value interest factor of an annuity due, take the calculation of the current value interest factor and duplicate it by (1+r), with "r" being the discount rate.
Highlights
- The current value interest factor of an annuity is utilized to compute the current value of a series of future annuities.
- It depends on the time value of money, which states that the value of a currency received today is worth more than a similar value of currency received sometime not too far off.
