Quote:
(A) they realized that, if they did not exploit its strategic location, their survival against the indomitable naval might of the British would always be in peril.
"They" and "their" can't possibly refer to "Germany's", since "Germany's" is a singular, possessive noun. So I guess "they" and "their" must refer to historians, and that makes no sense at all. Eliminate (A).
Quote:
(B) it realized that, if it did not exploit the island’s strategic location, Germany’s survival against the indomitable naval might of the British would always be in peril.
"It" has no clear antecedent here, either. "Germany's" is possessive, and the subject pronoun "it" can't refer back to a possessive antecedent. Plus, it's awfully weird to say that "Germany realized" something. (B) is gone.
Quote:
(C) the nation’s generals realized that, if Navarone’s strategic location was not exploited, Germany’s survival against the indomitable naval might of the British was always in peril.
I like the use of "the nation's generals", but the last chunk of the sentence is an if/then statement, and we need to use the conditional "would" instead of "was." (C) can be eliminated.
Quote:
(D) they realized that, if Navarone’s strategic location was not exploited, Germany’s survival against the indomitable naval might of the British was always in peril.
This has the same pronoun problem as (B), along with the verb form problem that appears in (C).
Quote:
(E) the nation’s generals realized that, if they did not exploit Navarone’s strategic location, Germany’s survival against the indomitable naval might of the British would always be in peril.
Much better! The verb is in the proper form, and the only pronoun in the underlined portion, "they", refers nicely back to the nation's generals. (E) is our answer.