Dell Ltd is considering updating their manufacturing systems, which will cost $70,000. The new system will be depreciated prime cost to zero over its 5-year life. It will probably be worth about $15,000 after 5 years. The new machine will save $10,000 per year in operating costs. The tax rate is 30 per cent, tax is paid in the year of income. Dell Ltd has several classes of outstand bonds, and the average yield is 8%. Its beta is 1.3, historical market risk premium is 7.94%, and the treasury yield is 5%. Please use the above information to answer following questions.

What is the required rate of return for Dell?

15.32%

Question:

If you hold $20,000 Dell shares, and plan to buy additional shares of IBM worth $15,000. The expected return for IBM is 5%. What is the expected return for your portfolio including both Dell and IBM? (Hint: use the required rate of return computed above)