Usually, circular calculations are a problem, but not always. Take this example: To compute your federal tax, you can deduct state taxes. To compute your state tax you start with federal taxable income. But wait, how do you know your federal taxable income until you’ve computed your state tax? How can you compute your state tax until you know your taxable income? Circular calculation to the rescue.
Here’s an example worksheet that illustrates the point. You can see that Excel has provided some blue arrows to tell me that I have a circular reference. (It also opens help for me – man, I hate that.)
To get rid of those errors and let Excel do the calculation for you, go to Tools>Options>Calculation and check the Iteration checkbox.
The default maximums are usually sufficient. Now Excel will iterate through the calculation until it reaches an answer or reaches its maximum iterations. The final calculation looks like this: