Timmins Company was approached by a local air-conditioning company with the propo¬

sition of replacing its old cooling system with a modern, more efficient unit. The cost of the new system was quoted at $50,000, but it would produce after-tax savings of $10,000 per year in power costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $10,000 per year and having a more reliable unit, the president of Timmins has asked for an analysis of the project's economic viability. All capital projects are required to earn at least the firm's cost of capital, which is 12%.

Required:

1. Calculate the project's internal rate of return. Should the company acquire the cooling system?

2. Suppose that power savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firm's cost of capital.

3. Suppose that the life of the cooling system is overestimated by 2 years. Repeat Re¬

quirements 1 and 2 under this assumption.