Due to the unreliable supply of power from the national grid, the city of Lagos wishes to build a backup system for which it needs to buy five fuel-powered heavy-duty generators with a combined capacity of 50 megawatts. The generators will be imported from Germany at 5 million Naira each and will have a 10-year economic life. They will be depreciated using the straight-line method to a net book value of 0.25 million Naira each.

The city expects to spend a start-up cost of 4 million Naira to build the power station and extend a distribution line to the main grid. Of the start-up costs, 60 per cent would be capitalized in the same way as the generators, and the rest would be expensed immediately. The project would also require investment in net working capital of 3 million Naira. Upon termination of the project at the end of 10 years, the city will spend 500,000 Naira on removal and clean-up costs. The project will generate revenue from electricity tariffs, and it is expected to have an additional pre-tax cash flow of 10 million Naira a year for the next 10 years. The project will be subject to a marginal tax rate of 30%.

Calculate:

• The net initial investment
• Net operating cash flows
• The net salvage value
• Incremental cash flows over the life of the project divided into three categories as cash flow in Year 0, years 1-9, and Year 10.