A firm is considering an expansion project that will last forever. The project requires an immediate purchase of a new piece of equipment that costs $1,000,000. The equipment will be fully depreciated using straight-line method over the next five years. There is no other capital expenditure for the project in any future years.

The project will generate annual sales of $800,000 and incur annual costs of $300,000 (all costs except depreciation) for each year. For any given year, the level of net working capital should be 20% of sales of the same year. There is no other capital expenditure for the project. The corporate tax rate is 30%.

1. Calculate the project cash flow for each year of the next three years (0, 1, 2, and 3). Assume that the cash flow will increase by 2% forever beyond year 3. What is the terminal value at year 3? (30 points)