What Is the Supply Worth Interest Factor of an Annuity?
The present value interest factor of an annuity is a component that can be used to calculate the existing value of a series of annuities when it is multiplied by the use of the routine charge amount. The initial deposit earns interest at the interest rate (r), which totally value vary a series of (n) consecutive withdrawals and may be written as the following parts:
- PVIFA = (1 – (1 + r)^-n) / r
PVIFA is also a variable used when calculating the existing value of an atypical annuity.
Supply Worth Interest Factor of Annuity (PVIFA)
Working out Supply Worth Interest Factor of Annuity
The calculation of PVIFA is consistent with the idea that that of the time value of money. This idea stipulates that the value of foreign exchange received in this day and age is value more than the value of foreign exchange received at a longer term date. It’s because the foreign exchange received in this day and age may be invested and can be used to generate interest.
Key Takeaways
- The present value interest factor of an annuity is used to calculate the existing value of a series of longer term annuities.
- It is consistent with the time value of money, which states that the value of a foreign exchange received in this day and age is value more than the identical value of foreign exchange received at a longer term date.
Supply Worth Interest Factor of an Annuity, With Tables
The most common values of each and every n and r will also be found in a PVIFA table, which straight away presentations the value of PVIFA. This table is a in particular great tool for comparing different scenarios with variable n and r values. The speed is displayed across the table’s perfect row, while the principle column presentations the number of periods.
The cell throughout the PVIFA table that corresponds to the right kind row and column indicates the existing value factor. This factor is multiplied in opposition to the buck amount of the routine charge (annuity charge) in question to succeed in at this time value. The key drawback of a present value interest factor table is the wish to round calculated figures, which sacrifices precision.
The Usefulness of the Supply Worth Interest Factor of Annuity
The present value interest factor of an annuity is useful when working out whether or not or to not take a lump-sum charge now or accept an annuity charge in longer term periods. Using estimated fees of return, you can read about the value of the annuity expenses to the lump sum. The present value interest factor would in all probability perfect be calculated if the annuity expenses are for a predetermined amount spanning a predetermined range of time.
Using the Bargain Rate for the Supply Worth Interest Factor
The discount value used throughout the supply value interest factor calculation approximates the expected value of return for longer term periods. It is adjusted for likelihood consistent with the duration of the annuity expenses and the investment automotive carried out. Higher interest rates result in lower web supply value calculations. It’s because the value of $1 in this day and age is diminished if most sensible returns are anticipated at some point.
Supply Worth Interest Factor of Annuity Due
If annuity expenses are due firstly of the length, the expenses are referred to as an annuity due. To calculate the existing value interest factor of an annuity due, take the calculation of the present value interest factor and multiply it by the use of (1+r), with “r” being the cut price value.
