We are now ready to calculate the interest expense in the model. Starting with the revolver interest expense, we're gonna take our interest rate assumption for the revolver all the way up from the financing assumption section of 5%. And we're gonna multiply times the average balance for our revolver for years one as well as the prior year, and that gives us zero. We're gonna do the same for our long-term debt. We have to pick up our interest rate assumption of 7% times the average balance for our long-term debt for years one as well as the prior year. And that gives us negative 2.3 to get our total interest expense. We're gonna sum this up and we're gonna copy this to the right across all eight years in the timeline. So the calculation of interest is pretty straightforward. What's a little more involved is the integration of our interest into the rest of the model, and there are two reasons why that's the case. The first is that when we integrate interest into the model, we create a circular reference, which I'm gonna explain shortly. But the second is that in this model, we have capitalized interest during the construction years as well as expensed interest in the income statement during the operational years. So let's begin with our capitalized interest. And our capitalized interest is gonna be incorporated into our sources and users of funds.

So to incorporate our interest during the construction years, what we need to do is we need to use an IF statement in order to manage the circular reference that we're gonna create. We're gonna make use of a circular breaker or a circular switch, which is gonna be off when we don't want any circularity, and it's gonna be on when we actually want the numbers to run through the model. And that, of course, will create a circularity. Now this switch is on the next tab over, and it's actually in the info tab in cell P10 or N10.

We're gonna say if the switch is equal to one, then we wanna bring the actual interest expense up all the way down from our interest calculation at the bottom here, and we wanna bring the number as a positive because we're putting that into our uses of funds. Otherwise, put a zero in place and that's gonna be our formula for our interest expense or our capitalized interest during the construction years. We can copy that, right? And right now the numbers are zero because our switch is off. So right now we're simply not linking to the interest expense, but instead just putting a zero on all three of those cells. Now, the reason why this will create a circular reference once we turn the switch on, it's because interest expense in this model is part of the total uses of funds, and the total uses of funds is actually paid or financed proportionally across debt and equity. So the higher the interest expense, of course, the higher the total spend and the higher the amount of debt financing needed. At the same time, the higher the amount of debt financing needed, the higher the interest expense. And there is where we see that circular reference.

Let's go ahead and deal with the interest integration on the income statement for our operational years. And that would be starting in year four. And we're gonna do something very similar. We're gonna say IF the circular switch in cell N10 of our info tab, we're gonna lock that in equals one. Then, now in this case, we do want the interest number to actually be negative because we're looking at an expense on the income statement. Otherwise we wanna make the zero close that down enter and copyright.

Once again, these numbers will be zero right now because our circular switch is off, but we've effectively integrated our interest across both the construction phase as well as the operational phase. Now let's go ahead and do the last step, which is turn our switch on. So let's go over to our info tab and in our circular switch cell, put a 1 there.

And what happens is you get a warning sign saying, Hey, you have one or more circular references. Now this is the way of Excel warning you about the presence of circularity in your model.

So if I press, okay, Excel at the moment will not be able to solve for this interest expense. And the reason is that Excel will normally solve for circular references using an iteration process. But right now we have the iteration tool of Excel turned off. So if we want Excel to actually solve our circular reference and show the actual interest In both the uses of funds as well as the income statement, we have to enable iterations. So I'm gonna open up our Excel options, and if we go to the formula tab in the Excel options, you will see this one checkbox that says enable iterative calculations. If you check that box, you click okay. Now, Excel is gonna be able to solve for your circular reference using an iterative process. And now as you can see, interest expense is showing in both the income statement during the operational phase, as well as the uses of funds during the construction phase.