Q 25.58:Sherman Equipment Manufacturing has identified a cost reduction project which will save labor costs to the extent of $1,500,000 a year but will add yearly depreciation of $267,857. The fixed costs will increase by $250,000 per year. There will be no effect on revenues and the new equipment will have a salvage value equal to twenty-five percent of the acquisition cost. The useful life of this project is estimated to be 7 years. What is the payback period for this project if the initial investment required is $2,500,000? Should Sherman accept the project if the benchmark period is 2.5 years?

• A
• :
• 1.67 years, yes
• B
• :
• 2.78 years, no
• C
• :
• 2.17 years, yes
• D
• :
• 2 years, yes