What does the expected rate of return mean?
Cash flows received from crowdfunding projects can vary greatly – for example, proceeds from equity capital investments depend on the success of the implementation of the business plan. In the case of an apartment building in development, overly slow sales and increasing input prices may constitute a risk. The opposite may also occur: the input prices are stable, but the market situation allows selling apartments faster than expected despite increasing sales prices.
In the case of business loans with a set payment schedule, there is slightly more clarity, but possible days of late payment interest must be considered – they may both increase and decrease the rate of return. It all depends on whether the late payment interest rate is the same as the interest rate of the loan or differs from it.
In both cases, investors are interested in the expected rate of return because based on that, decisions can be made about investing capital. Crowdestate uses the XIRR function, known from spreadsheet programs, to calculate the expected rate of return. As sums received from the project may differ in size and frequency, the XIRR function calculates the internal rate of return for an irregular cash flow. Here is an example.
Let us assume that we invest 1,000 euros to an equity capital project on 6 January. The market is more active than expected, which is why the developer decides to make the first disbursement of 550 euros on 9 August and the last, also of 550 euros, on 3 September.