# Present Value Interest Factor (PVIF) Explained: Formula and Applications

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## What Is the Present Value Interest Factor (PVIF)?

The present value interest factor (PVIF) is a formula used to estimate the current worth of a sum of money that is to be received at a future date, reflecting the time value of money. PVIF helps investors and analysts evaluate future cash flows or annuity payments by discounting them to their present value. PVIFs are often presented in tables showing values for different time periods and interest rate combinations for quick reference.

### Key Takeaways

*   The present value interest factor (PVIF) calculates the current worth of a future sum of money.
*   PVIF is essential for understanding the time value of money, highlighting that money now is more valuable than the same amount in the future.
*   Present value interest factors are often applied when analyzing financial products like annuities.
*   PVIF tables provide preset values for different time periods and interest rates, simplifying calculations.
*   PVIF calculations require a predefined payment amount and time span, making them ideal for estimating structured payments such as annuities.

## Calculating the Present Value Interest Factor (PVIF): Formula Explained

﻿ $\begin{aligned} &PVIF = \frac{a}{(1 + r)^{n}}\\ &\textbf{where:}\\ &a=\text{The future sum to be received}\\ &r=\text{The discount interest rate}\\ &n=\text{The number of years or other time period} \end{aligned}$﻿

## How PVIF Reflects the Time Value of Money

The PVIF relies on the financial concept of the [time value of money](https://www.investopedia.com/terms/t/timevalueofmoney.asp). Money today is worth more than in the future because it can grow over time. Money earns [interest](https://www.investopedia.com/terms/i/interest.asp), so receiving it sooner makes it more valuable.

PVIFs are commonly used to analyze [annuities](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp). The [present value interest factor of an annuity (PVIFA)](https://www.investopedia.com/terms/p/pvifa.asp) is useful when deciding whether to take a lump-sum payment now or accept an annuity payment in future periods. Using estimated rates of return, you can compare the value of the annuity payments to the [lump sum](https://www.investopedia.com/terms/l/lump-sum-payment.asp).

You can calculate PVIF only if annuity payments have a set amount and time span.

## Example: Calculating Present Value With PVIF

This example shows how to use PVIF to calculate a future sum's present value. Assume an individual is going to receive $10,000 five years from now, and that the current discount [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) is 5%. Using the formula for calculating the PVIF, the calculation would be $10,000 / (1 + 0.05) ^ 5. The PVIF calculation results in $7,835.26.

Find the present value by subtracting the PVIF from the future sum. Thus, the present value of the $10,000 to be received five years in the future would be $10,000 - $7,835.26 = $2,164.74.

> **Important**
>
> A PVIF can only be calculated for an annuity payment if the payment is for a predetermined amount and a predetermined period of time.

PVIF tables give a fractional number to multiply a future sum by, giving the PVIF for one dollar. To find the present value, multiply a future dollar amount by the inverse of the PVIF.

## How Do I Calculate the PVIF?

Add 1 and the discount interest rate, then multiply the sum by the number of years or another time period. Divide the future sum to be received by that multiplication result, and you have the present value interest factor (PVIF).

## What Is the PVIF Based on?

The PVIF is based on the time value of money. The meaning of that key financial concept is that a sum of money today is worth more than the same sum will be in the future, because money has the potential to grow in value over a given period of time.

## How Do PVIFs Apply to Annuities?

The present value interest factor of an annuity (PVIFA) is useful when you are deciding whether to take a lump-sum payment now or an annuity payment in future periods. Using estimated [rates of return](https://www.investopedia.com/terms/r/rateofreturn.asp), you can compare the value of the annuity payments to the lump sum.

## The Bottom Line

A present value interest factor (PVIF) helps illustrate the time value of money, showing that a dollar today is worth more than the same amount in the future. By discounting future sums, PVIF supports better financial decisions, such as comparing annuity payments with lump-sum options.

PVIF tables make it easy to reference values for different interest rates and time periods, as shown in the example calculation in the article. Accurate use of PVIF relies on selecting the right discount rate and time period for precise results.