Magellen Industries Is Analyzing a New Project

question 193

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

---

Definitions:

Critical Value

A threshold value that defines the boundary of the critical region, where if the test statistic exceeds this value, the null hypothesis is rejected.

Alpha

A threshold value used in hypothesis testing that represents the level of significance, typically set at 0.05 or 0.01, indicating the probability of wrongly rejecting the null hypothesis.

Chi-square Statistic

A statistical measure used to determine if there is a significant relationship between two categorical variables.

Degrees of Freedom

The number of independent values or quantities that can vary in the calculation of a statistic.