In bpp solution for the above question, when calculating the cost of the fixed bonds, they didn’t multiply the interest by (1-t) in the IRR calculation, eg they used the full $14.
Isn’t it correct to factor in the tax saving on the interest when calculating cost of debt??
True. Although because they are not calculating the cost for the purposes of discounting a project, but in order to compare swapping with not swapping, I think it is fair enough for them to ignore tax here.