HomeTimeValueofMoneyPresentValueInterestFactorofAnnuityPresentValueInterestFactorofAnnuityThepresentvalueinterestfactorofannuity(PVIFA)isafactorusedtocalculatethepresentvalueofaseriesofannuitypayments.Inotherwords,itisanumberthatcanbeusedtorepresentthepresentvalueofaseriesofpayments.Sincepresentvalueinterestfactorofannuityisabitofamouthful,itisoftenreferredtoaspresentvalueannuityfactororPVIFAforshort.Theinitialpaymentearnsinterestattheperiodicrate(r)overanumberofpaymentperiods(n).PVIFAisalsousedintheformulatocalculatethepresentvalueofanannuity.OnceyouhavethePVIFAfactorvalue,youcanmultiplyitbytheperiodicpaymentamounttofindthecurrentpresentvalueoftheannuity.Thissimplifiesthedecision-makingprocessforinvestorsandgenerallymakesiteasierforyoutocalculatethepresentvaluewithouthavingtoperformcomplexcalculations.Themostcommonwaytodothisisusingpresentvaluefactortables(whichI’llexploreinmoredetaillaterinthisarticle).PresentValueAnnuityFactorFormulaTheformulatocalculatePVIFAis:$$PVIFA=\dfrac{1-(1+r)^{-n}}{r}$$r=Periodicrateperperiodn=NumberofperiodsTheformulacalculatesthefuturevalueofonedollarcashflows.Whatdoesthismean?Putsimply,itmeansthattheresultingfactoristhepresentvalueofa$1annuity.Thismakesitveryeasyforyoutomultiplythefactorbypaymentamounttoworkoutthetotalpresentvalueoftheannuity.PresentValueAnnuityFactorExampleDavidhasinvestedinalocalbusinesssellingdesignerclothesandwillreceive10annualpaymentsataninterestrateof3%peryear.Howcanheworkoutthepresentvalueoftheinvestment?$$PVIFA=\dfrac{1-(1+3\%)^{-10}}{3\%}=8.53$$Thismeansthatevery$1hereceivesisworth$8.53inpresentvalue.Davidcannowworkoutthepresentvaluebasedonthepaymentamount.Solet’ssayheisreceivingapaymentof$2,000ayear:$$\$2{,}000\times8.53=\$17,060$$PresentValueAnnuityFactorAnalysisLikeallpresentvalueformulas,thePVIFAisbasedonthetimevalueofmoneyconcept,whichbasicallystatesthat$1todayisworthmoretodaythanatafuturetime.Theformulasallowyoutoworkoutthepresentvalueofanannuitysothatsmartinvestorscanseehowmuchtheirmoneyisworthtodaybec