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Problem - Julianna Cardenas, owner of Baker Company, was approached by a local dealer of air-conditioning units. The dealer proposed replacing Baker's old cooling system with a modern, more efficient system. The cost of the new system was quoted at $339,000, but it would save $60,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $60,000 per year and having a more reliable unit, Julianna requested 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 8%. There are no income taxes.
Required -
1. Suppose that energy 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.
2. Suppose that the life of the new system is overestimated by 2 years. Repeat Requirements 1 and 2 under this assumption.
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