A preferred equity investment is expected to generate a constant stream of annual cash flows of $25,000 a year for seven years. What is the present value of those cash flows with an opportunity cost of capital of 12%?

To calculate the present value (PV) of a preferred equity investment that generates a constant stream of cash flows, we can use the formula for the present value of an annuity. 

The formula for the present value of an annuity is:

\[
PV = C \times \left( \frac{1 - (1 + r)^{-n}}{r} \right)
\]

Where:
- $C$ is the annual cash flow ($25,000),
- $r$ is the opportunity cost of capital (12% or 0.12),
- $n$ is the number of years (7 years).

Let's plug in the values:

\[
PV = 25,000 \times \left( \frac{1 - (1 + 0.12)^{-7}}{0.12} \right)
\]

Let's calculate this.The present value of the cash flows is approximately **$114,093.91**.

Would you like more details or have any questions about this calculation?

Here are some related questions to consider:
1. How does the present value change if the opportunity cost of capital increases to 15%?
2. What would be the future value of these cash flows at the end of seven years with the same opportunity cost?
3. How does the present value change if the cash flows were expected to continue indefinitely (perpetuity)?
4. What if the annual cash flows increased by 2% each year instead of being constant?
5. How would you calculate the internal rate of return (IRR) for this investment?

**Tip:** The higher the opportunity cost of capital, the lower the present value of future cash flows.

Learn how to calculate the present value (PV) of annual cash flows generating $25,000 each year for 7 years, with an opportunity cost of capital at 12%. Get a detailed solution using the Present Value of Annuity formula and understand the impact of changing the opportunity cost of capital.

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