What is PVIFA and Why Should You Care?
Have you ever wondered whether it is better to take a lump sum of money now or receive a series of payments over time? That is where the Present Value Interest Factor of an Annuity (PVIFA) comes in handy.
PVIFA helps you determine the present value of a series of future annuity payments. This is crucial for making informed financial decisions, whether you are planning for retirement, financing a large purchase, or managing investments.
How to Calculate PVIFA
The formula is:
[PVIFA = \frac{1 - (1 + r)^{-n}}{r}]
Where:
- r is the Interest Rate Per Period (as a decimal)
- n is the Number of Periods
Step-by-Step:
- Add 1 to the interest rate per period. For 5%, you get 1.05
- Raise this sum to the power of the negative number of periods. For 10 periods: 1.05^-10
- Subtract this value from 1
- Divide the result by the interest rate per period
Calculation Example
Calculate PVIFA for an annual interest rate of 6% over 8 periods:
Convert 6% to decimal: 0.06
Step-by-Step Calculation
- 1 + Interest Rate: 1 + 0.06 = 1.06
- Raise to negative periods: 1.06^-8 = 0.6274
- Subtract from 1: 1 - 0.6274 = 0.3726
- Divide by interest rate: 0.3726 / 0.06 = 6.21
The PVIFA is approximately 6.21.
| Interest Rate | Number of Periods | PVIFA |
|---|---|---|
| 6% (0.06) | 8 | 6.21 |
Why It Matters
Want to compare if a $10,000 lump sum now is better than receiving $1,500 annually for 8 years? With PVIFA, you can do this quickly:
Present Value = $1,500 x 6.21 = $9,315
Since $9,315 < $10,000, the lump sum is the better choice in this case.