What it means
Money received in the future is worth less than the same amount received now, because money today can be invested to earn interest. The PVIF turns that idea into a single multiplier.
A PVIF of 0.8264 means that a dollar received in the future is worth about 82.64 cents today. The factor depends on two things: the interest rate (often called the discount rate) and the number of periods.
A higher rate or a longer wait makes the PVIF smaller, because the future money is worth less in today's terms. A lower rate or a shorter wait makes it closer to 1.
Before spreadsheets, accountants and bankers used printed tables of PVIFs, with rates across the top and years down the side. Today, most people calculate the factor in a spreadsheet or on a calculator, but the idea remains the same.
Understanding it helps in reading investment appraisals and loan documents. PVIF is used for a single lump sum arriving at one point in the future, such as a bond's face value paid at maturity or the proceeds of a property sale.
For a series of equal payments, a different factor called PVIFA is used. Finance teams often use both in the same calculation.
The factor is the heart of net present value analysis. When a company decides whether to invest in a project, it discounts each expected cash flow back to today and compares the total with the cost.
Choosing the discount rate is the hardest part, because a small change in rate can change the answer. A nuance is that the rate and the period must match.
If the rate is annual but the cash arrives quarterly, the rate and the number of periods must both be converted to quarters. Mixing an annual rate with a count of months is one of the most common errors.
In practice
Real-world examples.
Example
A company is owed $50,000 in three years by a customer on an extended payment plan. Using a discount rate of 8%, the PVIF is 1 / 1.08^3 = 0.7938. The receivable is worth about 50,000 x 0.7938 = $39,690 in today's money.
Example
A founder is offered a $200,000 payment in five years for selling her business. She uses a discount rate of 10%, which gives a PVIF of 0.6209. The offer is worth about $124,180 today, which she compares with a smaller cash offer made immediately.
Example
A landlord expects to sell a building in four years for $1,000,000. With a discount rate of 6%, the PVIF is 0.7921. He values that future sale at roughly $792,100 today when working out the total return on the property.
Formula
Calculation
PVIF = 1 / (1 + r) ^ n
Present value = future value x PVIF
Suppose a business will receive $121,000 in two years and the discount rate is 10% a year. PVIF = 1 / (1.10)^2 = 1 / 1.21 = 0.8264. Present value = 121,000 x 0.8264 = about $99,994, and working it exactly as 121,000 / 1.21 gives $100,000. The money to be received in two years is worth $100,000 today at a 10% rate.Case study
Seen in the real world.
Ashgrove Components is an illustrative, fictional supplier offered two ways of settling a large invoice. The customer would pay $240,000 now, or $275,000 in two years. The finance manager needed to know which was worth more.
She used a discount rate of 10%, giving a PVIF for two years of 1 / 1.21 = 0.8264. The later payment was worth 275,000 x 0.8264 = about $227,260 today, which is less than the $240,000 on offer immediately. Taking the cash now was the better deal at that rate.
She also noted that at a discount rate of 7%, the PVIF would be 0.8734 and the later payment would be worth about $240,185, almost the same as the cash. The illustrative lesson was that the answer depends on the rate chosen, so it should be tested.
Watch out
Common mistakes.
- Using the PVIF for a series of payments, when a single-sum factor only applies to one future amount.
- Mixing an annual interest rate with a number of months or quarters, which produces a wrong factor.
- Multiplying instead of dividing when working from the formula, which makes a future value look bigger instead of smaller.
Questions
People also ask.
What is the difference between PVIF and FVIF?
FVIF, the future value interest factor, grows a sum forward, while PVIF discounts a future sum back to today, and each is the reciprocal of the other.
Can PVIF be greater than 1?
Not with a positive interest rate, because discounting always reduces a future amount, so the factor stays below 1.
Where do I find PVIF values?
You can calculate them with the formula in a spreadsheet, or use a published table that lists the factor for each rate and number of years.
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