Lantern Industries has $8,000,000 in excess cash not required for the daily operations of the firm, and its bank will pay only 0.15% interest.  An advisor is offering a vehicle for investing the excess cash: buy another (unrelated) firm's preferred stock that yields 6% (the preferred dividend) paid at the end of each year, and then redemption of the preferred stock at face value paid simultaneously with the third preferred dividend payment. Lantern, deeming this a riskier investment than a bank deposit, would discount this investment at 7%.

 

The corporate tax rate on preferred dividends is 25% except that 70% of preferred dividend income is excluded from taxation (that is, only 30% of the preferred dividend is subject to the 25% preferred dividend tax). Remember, redemptions of original capital are not taxable, but interest and dividends are.

 

What is the NPV of this opportunity?