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401 Unauthorised access while installing XBAP applications

PresentationHost.exe is the process that hosts XBAP applications within Internet Explorer. When the files on the web server are configured to use Windows authentication, IE prompts the user for credentials when navigating to the XBAP. The root of the issue is that while Internet Explorer is using the user-specified credentials, PresentationHost is started using the credentials that were used to start the IE process, not the user-specified credentials. This leads to the 401 error when PresentationHost tries to download the XBAP, since it does not have access to the XBAP.

One solution is to allow anonymous authentication on the XBAP and perform the required authentication from within the application.