IRR is calculated through an iterative process, often using financial software or a financial calculator. The formula for IRR is complex and involves solving for the rate (r) in the NPV equation:
NPV = Σ [Cash Flow / (1 + r)^t] = 0
Where:
Σ = Sum of all cash flows t = Time period r = IRR
Due to its complexity, most businesses rely on Excel or specialized financial tools for accurate IRR calculations.