Magellen Industries Is Analyzing a New Project

Multiple Choice

Magellen Industries is analyzing a new project. The data they have gathered to date is as follows: Initial requirement for equipment: $120,000
Depreciation: Straight-line to zero over the four-year life of the project with no salvage value.
Required rate of return: 15%
Marginal tax rate: 35%

What is the degree of operating leverage under the worst-case scenario?

A) .93
B) 1.07
C) 1.63
D) 1.93
E) 2.07