Step 1: Check for continuity at $x=0$.
A function is continuous at $x=a$ if $\lim_{x \to a} f(x) = f(a)$.
Here, we need to check if $\lim_{x \to 0} x^2 \cos(\frac{\pi}{x}) = f(0) = 0$.
We use the Squeeze Theorem. We know that for any $x \neq 0$:
\[
-1 \le \cos(\frac{\pi}{x}) \le 1.
\]
Multiplying by $x^2$ (which is non-negative):
\[
-x^2 \le x^2 \cos(\frac{\pi}{x}) \le x^2.
\]
Since $\lim_{x \to 0} (-x^2) = 0$ and $\lim_{x \to 0} (x^2) = 0$, by the Squeeze Theorem:
\[
\lim_{x \to 0} x^2 \cos(\frac{\pi}{x}) = 0.
\]
Since the limit equals $f(0)$, the function is continuous at $x=0$.
Step 2: Check for differentiability at $x=0$.
We use the first principle definition of the derivative:
\[
f'(0) = \lim_{h \to 0} \frac{f(0+h) - f(0)}{h}.
\]
\[
f'(0) = \lim_{h \to 0} \frac{h^2 \cos(\frac{\pi}{h}) - 0}{h} = \lim_{h \to 0} h \cos(\frac{\pi}{h}).
\]
Step 3: Evaluate the limit for the derivative.
We use the Squeeze Theorem again.
\[
-1 \le \cos(\frac{\pi}{h}) \le 1.
\]
Multiplying by $h$:
If $h>0$, $-h \le h \cos(\frac{\pi}{h}) \le h$.
If $h<0$, $-h \ge h \cos(\frac{\pi}{h}) \ge h$.
In either case, as $h \to 0$, the function $h \cos(\frac{\pi}{h})$ is squeezed between two functions that approach 0.
\[
\lim_{h \to 0} h \cos(\frac{\pi}{h}) = 0.
\]
Since the limit exists and is finite, the function is differentiable at $x=0$, and $f'(0)=0$.