Reference no: EM132520548

Question - 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