How to Resolve Circular References in Project Finance Models
Originally published: 11/10/2018 13:30
Publication number: ELQ-92462-1
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How to Resolve Circular References in Project Finance Models

This innovative model provides a resolution for circular referencing.

This innovative parralel model – also known as the UDF (User-Defined Function) method – provides a logical and proactive resolution to the issue of circular references, using UDF.

Circular references describe the situation where a formula in a cell directly or indirectly refers to its own cell. Circular references become an issue because they lead to a situation where the calculation goes around and around, on an unfulfillable trajectory, without reaching an end result. This explains why they are also known as ‘Hitting the Wall’.

Unless all of the inputs in a project finance (PF) model are fixed, a circular reference will often arise. Therefore, it is important to know how to fix them.
The example uses statements with IDC (Interest During Construction), Fees, and DSRA (Debt Service Reserve Account). The latter being a vital component in most project finance models and term sheets. The DSRA protects the lender against unpredictable volatility.

By using the parallel method, the user’s project finance model will be faster, more accurate, more transparent, and much more flexible. These are among the key criteria for having a strong PF model.

Attached to this download is a helpful PDF guide that will provide a simple step-by-step tutorial on how to start resolving your circular references in your project finance models by using the innovative parallel method.

This Best Practice includes
1 Excel Spreadsheet, 1 PDF

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