Present Value Interest Factor of Annuity (PVIFA)

Present Value Interest Factor of Annuity, i.e., PVIFA, is an element used to estimate the current value of a sequence of the annuity payments. To put it another way, PVIFA is a number that represents the present value of the payment series. 

The commencing payment earns interest at a specific rate (r) above a series of periods for the payments (n). This formula is used to calculate the value of the annuity at present. When you know the PVIFA factor, the annuity's present value can be calculated by multiplying the periodic payment amounts. 

PVIFA Formula

PVIFA Formula is used to calculate the disbursement's present value from the annuity you will receive on a particular date in the future. Here is the formula,

PVIFA = {1- (1+r)-n }/r

PVIFA – Present Value Interest Factor of Annuity

r – The rate of interest

n – Number of years or number of periods of payment

Understanding of PVIFA

The present value interest factor is bottomed upon the prime financial idea of the time value of money. The concept means that today's value of money is more profitable than the same amount in the future. And the reason behind this is that money can grow its worth when a given particular period of time. As long as money can make interest, any sum that is received sooner is worthful as it can be reinvested to earn interest. 

The present value interest factor is more often utilized in studying the annuities. Present value factor interest of annuity (PVIFA) helps decide whether to accept the full payment today or opt for the annuity payments on a particular date in the future. Using the evaluated sum, you can analyze the worth of the entire payments and the overall payments from annuity and decide henceforth. 

Another critical point is that the present value interest factor can be calculated only when the annuity payments are for a determined amount over a predefined period. The present value interest factor of annuity is used to estimate the current value of a sequence of annuities in the future. 

Discount Rate in the PVIFA Formula

The discount rate is used to calculate the present value interest factor of annuity in terms of the expected return rate for the payments in the future. It can be adjusted based on the risk involved due to the time period of the payments of the sum and the utilization of the investment ratio. When the interest rate is higher, the overall present value of the annuities in the calculation will be lower. This fluctuation happens as the worth of one dollar at present is decreased when more returns are expected in the near future.

Present Value Interest Factor of Due in an Annuity

When the annuity payments are due during the annuity's commencement, then the sum to be paid is called due in the annuity. It is simple to estimate the present value interest factor of annuity in due. Consider the value from the PVIFA formula, and it is multiplied with (1+r), and r is the rate of discount or rate of interest.  

Calculate the Value of PVIFA using Tables

The table of PVIFA is used to find the value of the present value interest factor of annuity instantly using the most typical values of r and n. The PVIFA table is mainly used to compare and analyze the various scenarios provided with the variable values for r and n. The table consists of rows and columns, with the first row representing the rate of interest and the early column representing the measure of time.

The cell that is equating the particular row and a particular column represent the present value factor according to the PVIFA table. The obtained value is multiplied with the sum of the continual payment, i.e., the payment of annuity in the dollar. By following this procedure, you can attain the value of the present worth of your future shares using the PVIFA formula. Another point about using these tables is that the values calculated are roundabout values that lack precision. Here is an example for the table of the present value interest factor of the annuity will look like,

Period

Rate 1%

Rate 2%

Rate 3%

Rate 4%

Rate 5%

1

0.9905

0.9802

0.9707

0.9613

0.9521

2

1.9707

1.9418

1.9134

1.8863

1.8561

3

2.9412

2.8837

2.8288

2.7753

2.7233

4

3.9022

3.8079

3.7173

3.6295

3.5461

5

4.8532

4.7137

4.5795

4.4517

4.3294

6

5.7956

5.6017

5.4174

5.2423

5.0759

7

6.7284

6.4723

6.2301

6.0022

5.7861

8

7.6519

7.3257

7.0195

6.7329

6.4637

9

8.5662

8.1624

7.7863

7.4355

7.1073

10

9.4715

8.9828

8.5305

8.1107

7.7219

PVIFA Formula example:

Consider an example when a person is investing in an annuity with an interest rate of 2% per year. He receives a total of 9 annual payments. The present value interest factor of the annuity can be calculated from the PVIFA formula,

PVIFA = {1- (1+r)-n}/r

Hence the value will be,

PVIFA = {1- (1+2)-9}/2 

             = 8.1

The value obtained infers that he will receive an amount of Rs. 8.1 as the current value for every one rupee. Now he needs to find the current value based on his sum. For instance, let's assume that he receives a payment of Rs.1500 a year, then the present value interest factor for that particular annuity will be Rs. 12150.

This is how the present value interest factor of annuity is calculated using the PVIFA formula.

Know More: Types of Annuity | Annuity Plans

Written By: PolicyBazaar - Updated: 11 May 2021
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