What Is the Supply Value Interest Factor (PVIF)?
The prevailing value pastime factor (PVIF) is a technique used to estimate the existing price of a amount of cash that is to be won at some longer term date. PVIFs are incessantly offered inside the kind of a table with values for quite a lot of time periods and interest rate combinations.
The Components for the Supply Value Interest Factor Is

get started{aligned} &PVIF = frac{a}{(1 + r)^{n}} &textbf{where:} &a=text{The long run sum to be won} &r=text{The discount interest rate} &n=text{The choice of years or other time frame} end{aligned} ​PVIF=(1+r)na​where:a=The longer term sum to be wonr=The discount pastime fee​
Understanding the PVIF
The prevailing value pastime factor is in step with the vital factor financial concept of the time value of money. That is, a amount of cash in recent years is price more than the an identical sum shall be someday, because of money has the possible to expand in value over a given time period. Provided money can earn pastime, any amount of cash is price further the sooner it is won.
Supply value pastime parts are incessantly used in analyzing annuities. The prevailing value pastime factor of an annuity (PVIFA) is useful when deciding whether or not or to not take a lump-sum value now or accept an annuity value in longer term periods. Using estimated fees of return, you are able to review the cost of the annuity expenses to the lump sum.
The prevailing value pastime factor may best be calculated if the annuity expenses are for a predetermined amount spanning a predetermined range of time.
Key Takeaways
- Supply value pastime parts (PVIFs) are used to simplify a calculation of the time-value of a amount of cash to be paid someday.
- Supply value pastime parts are again and again used in analyzing annuities.
- Supply value pastime parts are available in table form for reference.
Example of the PVIF
That is an example of simple the way to use the PVIF to calculate the existing value of a longer term sum: Assume an individual is going to procure $10,000 5 years from now, and that the existing discount interest rate is 5%. Using the process for calculating the PVIF, the calculation can also be $10,000 / (1 + .05) ^ 5. The following PVIF decide from the calculation is $7,835.26.
The prevailing value of the long run sum is then decided via subtracting the PVIF decide from all of the longer term sum to be won. Thus, the existing value of the $10,000 to be won 5 years someday can also be $10,000 – $7,835.26 = $2,164.74.
A PVIF can best be calculated for an annuity value if the associated fee is for a predetermined amount and a predetermined time period.
PVIF tables incessantly provide a fractional amount to multiply a specified longer term sum via using the process above, which yields the PVIF for one buck. Then the existing value of any longer term buck amount can be figured via multiplying any specified amount in the course of the inverse of the PVIF amount.
