You are thinking of buying a startup for $40 million. The company will generate free cash flows of $6 million per year forever. You can take out an interest-only loan with an interest rate of 6%. The loan does not require any principal repayments and will go on forever. The weighted average cost of capital is 14% and the tax rate is 40%.

1.What is the NPV of buying the startup (in $million)?

2.How much of the $40 million should you borrow to achieve an internal rate of return of 20% on your equity investment?.

3.How much of the $40 million should you borrow to achieve an internal rate of return of 80% on your equity investment?