What method is typically used to evaluate the profitability of investments over their useful lives?

The net present value (NPV) method is commonly used to evaluate the profitability of investments over their useful lives because it takes into account the time value of money, which is a fundamental concept in finance. NPV assesses the difference between the present value of cash inflows generated by an investment and the present value of cash outflows over its lifetime.

By discounting future cash flows to their present value, NPV provides a comprehensive view of an investment's value. If the NPV is positive, it indicates that the investment is expected to generate more wealth than the cost incurred, thus being deemed profitable. Moreover, NPV allows for comparing different investments on a consistent basis by focusing on the actual increase in value that each project can bring.

Other methods, like cost-benefit analysis or payback period, do not fully incorporate the time value of money, which can lead to misleading conclusions about an investment's long-term profitability. Cost-benefit analysis is useful for assessing benefits in relation to costs but may not capture the timing of cash flows effectively. The payback period simply measures how long it takes to recover the initial investment without considering the cash flows beyond that point or their present values. Therefore, NPV stands out as the most effective and comprehensive