With Actuarial Net Present Value (ANPV), we follow the same steps outlined above to calculate NPV, but we also apply a survival probability haircut to each year’s present value cash flows based on standard actuarial tables. This is to account for the fact that each year there is some probability that the person or household receiving the income or funding the goal will no longer be alive.
ANPV gets used for certain income resources and spending goals where the income resource or goal only exists if the person or household associated with the item is alive. A good example of this is a retirement expense goal where it’s assumed the cash flows to fund the expense only exist as long as the principals of the household are still alive.
Some income resources and goals live beyond a specific person or even the household. In those cases, we continue to use the NPV method. A good example is a child’s education goal where the goal would still exist even if the principals of the household are no longer alive.
We calculate the annual future cash flows from the start date to the end date of the income resource or goal. If an item has an annual adjustment factor applied, such as Inflation, then we inflate the amount entered for the item each year by the annual adjustment factor from the current date forward.
We calculate the present value of each year’s future cash flows.
We multiply each year’s present value cash flows by a survival probability factor to determine each year’s actuarial present value cash flows.
We sum up the annual actuarial present value cash flows to determine the total actuarial present value for the item.
If an item’s cash flows are considered pre-tax dollars, we will calculate the total present value of the deferred income taxes on those cash flows and deduct that amount from the total actuarial present value to get the ANPV of the item.