Which method is commonly used to calculate the internal rate of return (IRR)?

The internal rate of return (IRR) is a critical concept in finance used to evaluate investment opportunities. One of the most efficient and practical methods to calculate IRR is through the use of financial calculators or software. These tools are specifically designed to handle the complex mathematical computations involved in determining the IRR, which represents the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

Financial calculators and software can quickly iterate through possible rates to find the one that achieves this balance, saving time and reducing the potential for error compared to manual calculations. They utilize algorithms that efficiently hone in on the IRR through numerical methods, which would not only be cumbersome but also less precise if done by hand.

In contrast, other methods mentioned, such as simply guessing rates or using a fixed interest rate, are less systematic and can lead to inaccurate results. Guessing, though sometimes part of the approach, lacks the precision of calculated methods. Using a fixed interest rate does not consider the variations in cash flows, which is essential for accurately determining IRR. Therefore, employing financial calculators or software is the standard and most reliable method for calculating IRR in practice.