If you have to borrow in a project company in order to pay the interest, we could end up with a circular reference.

The more interest we have to pay, the more debt we need to draw, which in turn triggers an ever higher cost of interest. This ends up in an endless loop. More debt, more interest equals more debt needed to be drawn to pay the interest, which in turn triggers an even higher interest cost. That kind of circular reference requires Excel to both know the amount of the debt and the amount of the interest at the same time. When those two numbers depend on each other.

Excel in that situation effectively stops working and it will give you inaccurate results. So circular references are quite dangerous.

There are a number of ways that we can get round a circular reference. One of which is we can turn on iterative calculations by going to the file menu in Excel, options, and then under the formulas tab tick where it says, use iterative calculations. Or we could use a copy and paste to break the circularity where we work out the interest in a formula that's outside of the main model and copy the results of that formula as hard coded numbers back into the main calculation. That removes the circularity, but every time we copy the interest amounts, the amount of debt will go up, which in turn will trigger higher interest amounts. So we're going to have to copy and paste the interest numbers multiple times. We could use a macro to do that, which would be a much more effective way of overcoming a circular reference. One way round, a circular reference is you can work out interest on the amount of debt at the beginning of the year. Now, if the debt is going up or down substantially during the year, working out interest based on what you owed at the beginning of the year is not going to be very accurate, but at least it avoids the circular reference.