For the $1 million construction project:

(a) With a $200,000 return, Uncle Sam would receive $200,000 . 45% = $90,000 if you pay out cash.

(b) If you finance with 80% debt, you will have $800,000 . 5% = $40,000 in interest to deduct from the $200,000 return. Thus, you would pay taxes only on $160,000. This lowers your tax bill to

$160,000 . 45% = $72,000. (Side advice: If you borrow $800,000, you may have to invest your $800,000 elsewhere. If you do not choose tax-exempts, Uncle Sam may receive more taxes from your additional income on the $800,000.)

(c) The net subsidy is $90,000 − $72,000 = $18,000 next year. At an appropriate cost of capital of 8%, this is a PV of $18,000/1.08 ≈ $16,667.