Capital project and sensitivity analysis Pigou Plastic Playthings, Inc. plans to acquire new production equipment for $68,480. The equipment has a useful life of 10 years and is expected to produce cost savings of $14,700 per year. There is no salvage value. The company's cost of capital is 16 percent. The plant manager believes that there is a possibility that the life of the project could be as little as 9 years. If this equipment is acquired, an alternative investment with a net present value of $2,000 and an internal rate of return of 16.7 percent will not be accepted.

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REQUIRED a. Compute the sensitivity of the 1-year prediction error in project life, using the net present value of the project, and also the cost of prediction error. b. Compute the sensitivity of the 1-year prediction error in project life, using the internal rate of return method, and also the cost of the prediction error. c. Find the error in annual cost saving that can be tolerated by management given the cost of capital and a 10 year project life. d. Find the error in project life that can be tolerated by management given the cost of capital.