In this workout, we're going to calculate the depreciation on construction CapEx being PP&E.

Okay? And that's there. And you can see we're gonna spend 300. But what's also going to happen is we're gonna have some capitalized expenses because in the construction phase there is no income statement. All costs end up in capital. They end up in the balance sheet. And then what's gonna happen is we're gonna have capitalized interest and we're gonna have it capitalizing for year three. And then it will stop capitalizing once we get an income statement, it'll start hitting the income statement, but the interest that we've already capitalized will then slowly be released as part of depreciation. And we could call this amortization as well. So the first thing we'll do is we'll start figuring out what the loan is gonna look like. Now, the beginning, we're gonna end up taking the ending and then the issuance in the construction phase and beyond. Actually we can model by pointing it to row eight because all construction CapEx it says is funded by loans. And then the ending, we can take a total like that. And what we can do is we can pull this all the way to year nine and you can see that the loan ends up being 300 and then staying at 300 because we're not gonna spend any more money after the construction. So we're not gonna borrow. The interest is being paid in cash. And so it's important to note that the interest will not accrue on top of the loan and then start to compound. It's paid in cash as it says up here in the preamble, but although it's paid in cash, it's gonna end up in two different places depending on where we are in the phase of the project. Now, either way, what we're gonna do is we're gonna take an average of the beginning, okay, which will be the previous ending and the ending, and that will give a nice view of the interest, sort of basing it on the average of the two. And then we're gonna multiply that by the interest rate. And there's no tax in this example, we're keeping it super simple, but we just need to remember to lock that interest rate. Otherwise when we copy it to the right, things will fall apart. So you can see that given we are somewhere between nought and a hundred, we're then paying halfway through that and it ends up being an interest expense of 2.5. And we can pull that all the way to the right as well. And you can see the interest ramps up and then stays put because our debt stays put eventually. Okay? What's gonna happen next is we are gonna find out how much capitalized stuff we've got, which will then get released into the income statement as depreciation and amortization. So we're starting a new base account, we're gonna put the CapEx in, and again, we can point it at this and that will copy all the way to the right when we stop spending. That's fine. And then what's gonna Happen is we'll need to be a bit careful with this initially we're gonna capitalize that interest and that capitalized interest. It represents us not having an income statement, but instead adding that cost to the loan in a capital sense. Now, because we're in the construction period, there is no depreciation yet. And so what we're doing is we're just building up capital. And now if we carefully take that and we can't just copy it all the way to the right, let's copy it to the end of the construction period. And if I just show my formula there to show you where I got all my stuff from, you can see that at the end of the construction period, we end up with 322.5. And we will now stop capitalizing costs and we will start depreciating. And so we can't just take this block and copy to the right anymore. We can copy certain things like the beginning and the ending. That works fine, but we've gotta be careful the CapEx will work because it starts throwing zeros. Because we're, we're not spending any money anymore, but we mustn't start taking the capitalized interest to the right because we are not going to capitalize anymore. What we're going to do is that next 15 will actually hit the income statement. And so doesn't need to feature down here at all. That will go into interest expense.

And then the income statement will also be hit by a depreciation expense.

Now it's tempting to grab the starting amount and then lock it and then depreciate that by the period that is suggested. So four years, excuse me, five years, and then lock that. And then it's tempting to say, well, that will be the reduction, and then let's go for it. Let's see what happens. So if we then copy it to the right, you'll see that that works really well for 1, 2, 3, 4, 5 years. But then we get something unusual happening. We have a negative ending balance. And what's happened is that we have ended up depreciating down beyond zero, which is not good. Okay? So let's get rid of that and start again. And what we've got to do is we've got to take this and we've gotta wrap it in a min and we've gotta say yes, although I would like you to go and find the yearly depreciation. I want you also to look at the starting balance. And if that's lower, take that instead.

Okay, so if I show my formula there, you'll see that the result here is no different. But if I take that and copy it to the right, you'll see that especially in the last year, it makes a big difference. And that's because it avoids you depreciating down below zero.