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Postby deepalipawar91 » Wed Mar 25, 2015 12:52 pm

Do we charge IDC on average debt outstanding or absolute debt outstanding? Which one is more advisable and why?

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Postby edupristine » Thu Mar 26, 2015 5:17 am

Hi, IDC is calculated on weighted average expenditure during the construction timeline not the total debt outstanding. This can be explained with the help of an example:
Company "X" is constructing a branch office. The total cost of construction is estimated as $1 million and occurs over a six month time-frame. The costs include the purchase of the office for $800,000, and construction costs of $100,000 per month. Company X financed the purchase of the office with debt at 6.5%, while the remaining costs of the project were financed using Company X's existing debt structure at 6.0%. IDC will be calculated as follows:
Interest for purchase on office: $800,000*6/12*6.5%= $26,000
Interest for construction cost: $300,000*6/12*6%= $7,500
Total IDC= $33,500
Expenditure is estimated on weighted average during the construction i.e. $300,000 and not on absolute i.e. $600,000.

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