Capitalized Interest Calculation

Settings that Affect Capitalized Interest Calculation

The Calculate Capitalized Interest process takes the following settings into consideration.

If asset lines are generated for expenditure items, the process doesn't generate capital interest for those items.
If expenditure items map to the expenditure types specified in the Excluded Expenditure Types section of the Manage Capitalized Interest Rates page, capital interest won't be generated for those items.
If the project setup date is before the period end date, the process doesn't generate capital expenditures.
Here's how Amount Type affects capitalized interest:
- If Budget is the Amount Type, the process checks if the Project or Task Amount Budget for the Financial Plan Type meets the threshold Project Amount or Task Amount defined. Only when the threshold is met, the process generates capital interest for expenditure items which haven't been capitalized.
- If Open CIP is the Amount Type, the process checks if the sum of expenditure items which aren't capitalized meets the threshold Project Amount or Task Amount defined. Only when the threshold is met, the process generates capital interest for items which haven't been capitalized.
- If Total CIP is the Amount Type, the process checks if the sum of all the expenditure items (the ones that have been capitalized and the ones that haven't been capitalized) meets the threshold Project Amount or Task Amount defined. Only when the threshold is met, the process generates capital interest for items which haven't been capitalized. Keep in mind that Capitalized Interest isn't generated for expenditure items for which asset lines have been generated.

Calculate Capitalized Interest

To calculate interest, perform the following steps for each item in the project:

In the Manage Capitalized Interest Rates page, create a capital interest rate.
In the Manage Capitalized Interest Rate Schedules page, create a rate schedule and then click the Build Rate Schedule button.
Create expenditure items.
Run the Import and Process process.
Run the Account and Post to Ledger process.
Run the Generate Capitalized Interest process.
Review the status of the process in the Manage Capitalized Interest page. The status should be Draft success.
Verify the calculations and click the Release button. The expenditure item for the interest is created.

Note: Do not generate asset lines for these expenditure items. If you do so, interest won't be calculated for those expenditure items.

How Simple Interest is Calculated

Here's the formula used by the Calculate Capitalized Interest process to calculate simple interest.

Capital Interest Amount = Eligible Costs * Period Multiplier * Rate Multiplier

Here are the formulas to determine Eligible Costs, Period Multiplier and Rate Multiplier in case of Simple Interest.

Eligible Costs = Sum of Costs from Prior Periods + Current Period Costs * Current Period Calculation Method - Costs in Which Asset Lines were Generated
If Basis Method is set to Spread evenly, then Period Multiplier = 1/12.
If Basis Method is set to By number of days, then Period Multiplier = Number of days in the month/365. For example, for January, the value of Period multiplier is 31/365.
Rate Multiplier = Interest Rate/100

Examples of Simple Interest Calculation

Let's look at examples of how simple interest is calculated for different settings.

Here's a table that contains the values of settings, such as Current Period Costs, Asset Lines Generated, Period Multiplier and Rate Multiplier, that affect simple interest for a period of 6 months. The table also contains the derived values of Eligible Costs for various Current Period Calculation Method settings.

Month	January	February	March	April	May	June
Current Period Costs (Expenditure Items)	$50,000	$50,000	$50,000	$50,000	$50,000	$50,000
Asset Lines Generated	$0	$0	$0	$10,000	$10,000	$10,000
Sum of Costs from Prior Periods	$0	$50,000	$100,000	$150,000	$200,000	$250,000
Eligible Costs when Current Period Calculation Method is Full (1)	$50,000	$100,000	$150,000	$190,000	$240,000	$290,000
Eligible Costs when Current Period Calculation Method is Half (0.5)	$25,000	$75,000	$125,000	$165,000	$215,000	$265,000
Eligible Costs when Current Period Calculation Method is None (0)	$0	$50,000	$100,000	$140,000	$190,000	$240,000
Period Multiplier if Basis Method is Spread evenly	1/12	1/12	1/12	1/12	1/12	1/12
Number of Days in the Month	31	28	31	30	31	30
Period Multiplier if Basis Method is By number of days	31/365	28/365	31/365	30/365	31/365	30/365
Rate multiplier	5% (0.05)	5% (0.05)	5% (0.05)	5% (0.05)	5% (0.05)	5% (0.05)

Here's a table that contains the values of simple interest calculated based on the settings in previous table for all the combinations of Current Period Calculation Method and Basis Method.

Month	January	February	March	April	May	June
Simple Interest when: Current Period Calculation Method is Full Basis Method is Spread evenly	$208.33	$416.67	$625.00	$791.67	$1,000.00	$1,208.33
Simple Interest when: Current Period Calculation Method is Half Basis Method is Spread evenly	$104.17	$312.50	$520.83	$687.50	$895.83	$1,104.17
Simple Interest when: Current Period Calculation Method is None Basis Method is Spread evenly	$0.00	$208.33	$416.67	$583.33	$791.67	$1,000.00
Simple Interest when: Current Period Calculation Method is Full Basis Method is By number of days	$212.33	$383.56	$636.99	$780.82	$1,019.18	$1,191.78
Simple Interest when: Current Period Calculation Method is Half Basis Method is By number of days	$106.16	$287.67	$530.82	$678.08	$913.01	$1,089.04
Simple Interest when: Current Period Calculation Method is None Basis Method is By number of days	$0.00	$191.78	$424.66	$575.34	$806.85	$986.30

Let's take a closer look at some of the examples.

Here's how simple interest is calculated for March when Current Period Calculation Method is Full and Basis Method is Spread evenly.

Eligible Costs = $100,000 (Sum of Costs from Prior Periods. That is, costs for January and February.) + $50,000 (Current Period Costs. That is, costs for March.) * 1 (Current Period Calculation Method is Full) - $0 (Costs in Which Asset Lines were Generated) = $150,000
Period Multiplier = 1/12 (Basis Method is Spread evenly)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Simple Interest = $150,000*(1/12)*(5/100) = $625

Here's how simple interest is calculated for April when Current Period Calculation Method is Half and Basis Method is By number of days.

Eligible Costs = $150,000 (Sum of Costs from Prior Periods. That is, costs for January, February and March.) + $50,000 (Current Period Costs. That is, costs for April.)*0.5 (Current Period Calculation Method is Half) - $10,000 (Costs in Which Asset Lines were Generated) = $165,000
Period Multiplier = 30/365 (Basis Method is By number of days)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Simple Interest = $165,000*(30/365)*(5/100) = $678.08

How Compound Interest is Calculated

The formula used to calculate simple interest is similar to the formula used to calculate compound interest. However, in case of compound interest, Eligible Costs also include the sum of interests from all the prior periods.

Here's the formula used by the Calculate Capitalized Interest process to calculate compound interest.

Capital Interest Amount = Eligible Costs * Period Multiplier * Rate Multiplier

Here are the formulas to determine Eligible Costs, Period Multiplier and Rate Multiplier in case of Compound Interest.

Eligible Costs = Sum of Costs from Prior Periods + Current Period Costs * Current Period Calculation Method - Costs in Which Asset Lines were Generated + Sum of Interest from Prior Periods
If Basis Method is set to Spread evenly, then Period Multiplier = 1/12.
If Basis Method is set to By number of days, then Period Multiplier = Number of days in the month/365. For example, for January, the value of Period multiplier is 31/365.
Rate Multiplier = Interest Rate/100

Examples of Compound Interest Calculation

Let's look at examples of how compound interest is calculated for different settings. Keep in mind that the values of eligible costs vary based on the interest generated.

First, we will look at how compound interest is calculated when the Basis Method is Spread evenly.

Here's a table that contains the values of settings, such as Current Period Costs, Asset Lines Generated, Period Multiplier and Rate Multiplier, which affect compound interest for a period of 6 months. The table also contains the derived values of Eligible Costs for various Current Period Calculation Method settings when the basis method is Spread evenly.

Month	January	February	March	April	May	June
Expenditure Items/Current Period Costs	$50,000	$50,000	$50,000	$50,000	$50,000	$50,000
Asset Lines Generated	$0	$0	$0	$10,000	$10,000	$10,000
Sum of Costs from Prior Periods	$0	$50,000	$100,000	$150,000	$200,000	$250,000
Eligible Costs when: Calculation Method is Full (1) Basis Method is Spread evenly	$50,000.00	$100,208.33	$150,625.87	$191,235.48	$242,050.37	$293,058.91
Eligible Costs when: Calculation Method is Half (0.5) Basis Method is Spread evenly	$25,000.00	$75,104.17	$125,417.10	$165,939.67	$216,631.09	$267,533.72
Eligible Costs when: Calculation Method is None (0) Basis Method is Spread evenly	$0.00	$50,000.00	$100,208.33	$140,625.87	$191,211.81	$242,008.53
Period Multiplier when Basis Method is Spread evenly	1/12	1/12	1/12	1/12	1/12	1/12
Rate Multiplier	0.05	0.05	0.05	0.05	0.05	0.05

Here's a table that contains the values of compound interest calculated based on the settings in previous table for all the combinations of Current Period Calculation Method when the Basis Method is spread evenly.

Month	January	February	March	April	May	June
Compound Interest when: Current Period Calculation Method is Full (1) Basis Method is Spread evenly	$208.33	$417.53	$627.61	$796.89	$1,008.54	$1,221.08
Compound Interest when: Current Period Calculation Method is Half (0.5) Basis Method is Spread evenly	$104.17	$312.93	$522.57	$691.42	$902.63	$1,114.72
Compound Interest when: Current Period Calculation Method is None (0) Basis Method is Spread evenly	$0.00	$208.33	$417.53	$585.94	$796.72	$1,008.37

Month

January

February

March

April

May

June

Compound Interest when:

Current Period Calculation Method is Full (1)
Basis Method is Spread evenly

$208.33

$417.53

$627.61

$796.89

$1,008.54

$1,221.08

Compound Interest when:

Current Period Calculation Method is Half (0.5)
Basis Method is Spread evenly

$104.17

$312.93

$522.57

$691.42

$902.63

$1,114.72

Compound Interest when:

Current Period Calculation Method is None (0)
Basis Method is Spread evenly

$0.00

$208.33

$417.53

$585.94

$796.72

$1,008.37

Let's take a closer look at some of the examples.

Here's how compound interest is calculated for March when Current Period Calculation Method is Full and Basis Method is Spread evenly.

Eligible Costs = $100,000 (Sum of Costs from Prior Periods. That is, costs for January and February.) + $50,000 (Current Period Costs. That is, costs for March.) * 1 (Current Period Calculation Method is Full) - $0 (Costs in Which Asset Lines were Generated) + $208.33 + $417.53 (Interest from the prior periods) = $150,625.87
Period Multiplier = 1/12 (Basis Method is Spread evenly)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Compound Interest = $150,625.87*(1/12)*(5/100) = $627.61

Here's how compound interest is calculated for April when Current Period Calculation Method is Half and Basis Method is spread evenly.

Eligible Costs = $150,000 (Sum of Costs from Prior Periods. That is, costs for January, February and March.) + $50,000 (Current Period Costs. That is, costs for April.)*0.5 (Current Period Calculation Method is Half) - $10,000 (Costs in Which Asset Lines were Generated) + $104.17 + $312.93 + $522.57 (Interest from the prior periods) = $165,939.67
Period Multiplier = 1/12 (Basis Method is Spread evenly)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Simple Interest = $165,939.67*(1/12)*(5/100) = $691.41

Let's look at how compound interest is calculated when the Basis Method is By number of days.

Here's a table that contains the values of settings, such as Current Period Costs, Asset Lines Generated, Period Multiplier and Rate Multiplier, which affect compound interest for a period of 6 months. The table also contains the derived values of Eligible Costs for various Current Period Calculation Method settings when the basis method is By number of days.

Month	January	February	March	April	May	June
Expenditure Items/Current Period Costs	$50,000	$50,000	$50,000	$50,000	$50,000	$50,000
Asset Lines Generated	$0	$0	$0	$10,000	$10,000	$10,000
Sum of Costs from Prior Periods	$0	$50,000	$100,000	$150,000	$200,000	$250,000
Eligible Costs when: Calculation Method is Full (1) Basis Method is By number of days	$50,000.00	$100,212.33	$150,596.70	$191,236.23	$242,022.13	$293.049.89
Eligible Costs when: Calculation Method is Half (0.5) Basis Method is By number of days	$25,000.00	$75,106.16	$125,394.24	$165,926.74	$216,608.63	$267,528.47
Eligible Costs when: Calculation Method is None (0) Basis Method is By number of days	$0.00	$50,000.00	$100,191.78	$140,617.25	$191,195.13	$242,007.06
Number of days in the month	31	28	31	30	31	30
Period Multiplier when Basis Method is By number of days	31/365	28/365	31/365	30/365	31/365	30/365
Rate Multiplier	0.05	0.05	0.05	0.05	0.05	0.05

Here's a table that contains the values of compound interest calculated based on the settings in previous table for all the combinations of Current Period Calculation Method when the Basis Method is By number of days.

Month	January	February	March	April	May	June
Compound Interest when: Current Period Calculation Method is Full (1) Basis Method is By number of days	$212.33	$384.38	$639.52	$785.90	$1,027.77	$1,204.31
Compound Interest when: Current Period Calculation Method is Half (0.5) Basis Method is By number of days	$106.16	$288.08	$532.50	$681.89	$919.84	$1,099.43
Compound Interest when: Current Period Calculation Method is None (0) Basis Method is By number of days	$0.00	$191.78	$425.47	$577.88	$811.92	$994.55

Month

January

February

March

April

May

June

Compound Interest when:

Current Period Calculation Method is Full (1)
Basis Method is By number of days

$212.33

$384.38

$639.52

$785.90

$1,027.77

$1,204.31

Compound Interest when:

Current Period Calculation Method is Half (0.5)
Basis Method is By number of days

$106.16

$288.08

$532.50

$681.89

$919.84

$1,099.43

Compound Interest when:

Current Period Calculation Method is None (0)
Basis Method is By number of days

$0.00

$191.78

$425.47

$577.88

$811.92

$994.55

Let's take a closer look at some of the examples.

Here's how compound interest is calculated for March when Current Period Calculation Method is Full and Basis Method is By number of days.

Eligible Costs = $100,000 (Sum of Costs from Prior Periods. That is, costs for January and February.) + $50,000 (Current Period Costs. That is, costs for March.) * 1 (Current Period Calculation Method is Full) - $0 (Costs in Which Asset Lines were Generated) + $212.33 + $384.38 (Interest from the prior periods) = $150,596.70
Period Multiplier = 31/365 (Basis Method is By number of days)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Compound Interest = $150,596.70*(1/12)*(5/100) = $639.52

Here's how compound interest is calculated for April when Current Period Calculation Method is Half and Basis Method is spread evenly.

Eligible Costs = $150,000 (Sum of Costs from Prior Periods. That is, costs for January, February and March.) + $50,000 (Current Period Costs. That is, costs for April.)*0.5 (Current Period Calculation Method is Half) - $10,000 (Costs in Which Asset Lines were Generated) + $106.16 + $288.08 + $532.50 (Interest from the prior periods) = $165,926.74
Period Multiplier = 30/365 (Basis Method is By number of days)
Rate Multiplier = 5/100 (Interest Rate is 5 percent)
Simple Interest = $165,939.67*(1/12)*(5/100) = $681.89