Should danny invest in the garage project

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Reference no: EM131461958

Danny zuko is thinking of opening a garage shop. The initial cost of the garage is $75K. If the garage is successful, it will generate annual free cash flows of $30K into perpetuity. If not, Danny will only be able to generate $5K of annual free cash flows.

1. If the probability of success is 40% and the required rate of return is 20%, should Danny invest in the car garage?

2. In researching it further, Danny finds that if the garage doesn't succeed he can sell the equipment in a secondary market. He figures he can sell the assets for $40K after taxes on the first year. Should Danny invest in the garage project? Why? Assume he doesn't get that $5K in the first year.

Reference no: EM131461958

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