StevenClark.com.au Time Value of Money: Financial Tables

The previous article – Time Value of Money: Present & Future – introduced you to the calculation for the Present and Future Values of a single amount. In this article I’d like to build on that knowledge.

Four Financial Tables – PVIF, FVIF, PVIFA & FVIFA

We can work through Time Value of Money calculations using the mathematical formula… or we can use a financial calculator… spreadsheet functions… or freely available Financial Tables. Any managerial finance textbook will have a copy of these Financial Tables toward the appendices at the back. They should run up to a 50 per cent interest rate.

There are four tables that you need for working out the Time Value of Money:

1. Future Value Interest Factor (FVIF) for working out the Future Value of a fixed amount;
2. Present Value Interest Factor (PVIF) for working out the Present Value of a fixed amount;
3. Future Value Interest Factor of an Annuity (FVIFA) for the Future Value of a fixed stream; and
4. Present Value Interest Factor of an Annuity (PVIFA) for the Present Value of a fixed stream.

Given the correct formula you can look up n (number of terms) and i (the interest rate) as an intersection in the correct Financial Table for FVIF, PVIF, FVIFA or PVIFA.

Future Value of a Fixed Amount (Revisited)

The earlier example: the offer of a payment of \$10,000 today or \$10,000 in three years at five per cent annual interest using the equation:

Future Value = Present Value * (1 + i)n

… can be rewritten as & followed through with:

• Future Value = Present Value * (FVIFi,n)
• Future Value = \$10,000 * (FVIF0.05,3)
• Future Value = \$10,000 * 1.158
• Future Value = \$11,580 Comparing the Financial Table answer of \$11,580 with the calculated answer of \$11,576.25 (from the previous article – Time Value of Money: Present & Future) we can see a general concensus. Of course, the calculated answer is more accurate but in most decision making situations you don’t need exact numbers. Just strong approximates.

Present Value of a Fixed Amount (Revisited)

In a similar way we can look at the Present Value of a fixed amount of \$10,000 to be handed over in 3 years time given the same five per cent annual interest:

Present Value = Future Value * (1 + i)-n

… to be rewritten and followed through with:

• Present Value = Future Value * (PVIFi,n)
• Present Value = \$10,000 * (PVIF0.05,3)
• Present Value = \$10,000 * 0.864
• Present Value = \$8,640 Again, comparing the Financial Tables result of \$8,640 to the calculated result of \$8,638.38 (from the previous article – Time Value of Money: Present & Future) you can see they are almost the same. You can have confidence in the answers provided by the use of Financial Tables.

The Next Step: Annuities, Perpetuities & Mixed Streams

With the aid of the other two Financial Tables (FVIFA and PVIFA) the next step will be to explain and help you calculate annuities. Then we’ll quickly look at perpetuities and move onto a final article explaining how to solve more complex Time Value of Money problems involving mixed streams of finance.

It’s not rocket science. However, taking the time to understand Time Value of Money empowers you to make better informed decisions. As you can see, the formulas are donkey-simple. Hang in there.

Time Value of Money 101 Series  