AppleScript checking if folder exists causes “AppleEvent handler failed” error -10000
I think I found the answer: removed the word 'folder' from the if statements and now it works!

If anyone could confirm this is the proper syntax that would be great.

tell application "Finder"

    set targetFolder to POSIX file "/Users/Billy/TESTING/FOLDER1" -- Existing folder

    if exists targetFolder then
        say "TRUE" -- result!!
    else
        say "FALSE"
    end if

    set targetFolder to POSIX file "/Users/Billy/TESTING/FOLDER2" -- Non-existing folder

    if exists targetFolder then
        say "TRUE"
    else
        say "FALSE" -- result!!
    end if

end tell