Is it just me who has this absurd obsession over watching your savings grow every time you put money in?
So, you’re saving money by putting some amount aside each month.
This regular saving is like an “annuity.” The present value interest factor of annuity (PVIFA) helps us determine how much all those future savings are worth today.
And my handy PVIFA calculator helps you figure it all out.
PVIFA Definition
The Present Value Interest Factor of Annuity (PVIFA) helps you determine the present value of a series of annuity payments.
The PVIFA is essential when evaluating investments or loans with regular cash flows.
The formula focuses on the time value of money. It tells you how much money you’ll need to invest now to achieve a specific future value.
Key Elements:
- Present Value: Current worth of future cash flows.
- Future Value: Value of the investment at a specific future date.
- Interest Rate: Rate of return, denoted as a percentage.
- Annuity: Equal cash flow payments made at regular intervals.
PVIFA Formula
The formula for calculating PVIFA is:
PVIFA = (1 - (1 + r)-n) / rLet’s break down the variables in this formula:
- r = Rate of interest per period (expressed as a decimal).
- n = Number of periods (specified period over which the calculations are made).
But does the PVIFA result tell me?
It tells you how much all those future money is worth today. It’s a bit confusing to understand, so let’s go through a calculation step by step.
PVIFA Example Calculation
Imagine saving $20,000 annually for five years at a rate of 6%.
- Number of periods: 5 years
- Annual interest rate: 6% (0.06 as decimal)
- Yearly savings: $20,000
Now, apply the formula to calculate PVIFA:
PVIFA = (1 - (1 + 0.06)-5) / 0.06
PVIFA = (1 - 0.747) / 0.06
PVIFA = ~4.212So, the PVIFA is approximately 4.212.
This means that each $1 you receive in the future is worth about $4.217 today.
So, to calculate the present value of the annuity, you need to multiply $20,000 by PVIFA.
Present Value = $20,000 * 4.212
Present Value = $84,247.28The present value of those future payments is $84,247.28.