Capital project 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 cost savings could be as little as $13,700 per year.

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REQUIRED Compute the sensitivity of the $1,000 prediction error in cost savings, and calculate the cost of prediction error assuming no alternative investment, using: a. The net present value of the project. b. The internal rate of return.