The UTSC Sports Arena has approached Nova to supply a special type of raisin bread for all events hosted at the arena for a period of five years. The deal requires 50 dozen of raisin bread per day, at a discounted rate of $2.99 per dozen. If this level of service is not met, Nova would be subject to a penalty.

As part of the agreement, Nova will be required to use the Bonnel flour supplied by a key sponsor of the UTSC Sports Arena. Bonnel is a local flour mill that is known for late delivery and quantity discrepancy on its orders.

To meet the arenas demands we would need to invest in a specialized piece of equipment that makes these bread. The machine will cost $100,000 and requires annual recalibration at a cost of $5,000 per year.

This machine will take less time to produce a batch of raisin bread (45 dozen) which would reduce the variable cost per batch of bread to $34.25 due to decreased labour costs. This machine comes from Switzerland, and Nova would have to bring over one of their technicians if it ever required repair.

Nova uses a 12% weighted average cost of capital when evaluating these types of investments. The tax impact can be ignored for the purpose of this calculation.

Nova is asked to be the sole supplier of raisin bread to the UTSC Sports Arena for all their tournaments held . Rick and Peter are interested in knowing if this opportunity will help to contribute to their bottom line.