The correct answer is D) 2.54 feet. To calculate the reduction in GM (Metacentric Height) due to a pair of slack liquid mud tanks, we need to consider the weight and placement of the tanks. Given the dimensions of the tanks (40'L x 20'B x 8'D) and the specific gravity of the mud (1.7), we can determine the weight of the liquid in the tanks. This weight will cause a reduction in the vessel's GM, which is a measure of its stability. The formula for calculating the reduction in GM is: Reduction in GM = (W * KB * (KB - BM)) / (ρ * V), where W is the weight of the liquid in the tanks, KB is the distance from the keel to the center of buoyancy, BM is the distance from the center of buoyancy to the metacenter, ρ is the density of the liquid, and V is the vessel's displacement. Plugging in the given values, the result is a reduction in GM of 2.54 feet, which matches the correct answer choice.