Final answer:
When comparing projects with unequal lives, the Net Present Value (NPV) method is recommended as it accounts for the time value of money and allows for a fair comparison by calculating the present value of future cash flows.
Step-by-step explanation:
When comparing projects with unequal lives, one should primarily use the Net Present Value (NPV) method. NPV is the most appropriate tool in this context because it takes into account the time value of money, calculating the present value of a series of future cash flows which could span different lengths of time for each project. Using NPV allows for a fair comparison by bringing the value of future cash flows, savings, or benefits back to the present dollar value, enabling clear decisions despite the projects' differing durations.
Methods like the Internal Rate of Return (IRR), Payback Period, and Profitability Index may not provide an accurate comparison when the projects have different operational lives. NPV, on the other hand, not only considers the magnitude and timing of cash flows but also provides a single figure that reflects the projected benefit of an investment over the project's entire lifespan. This is particularly important for long-term financial commitments, such as infrastructure projects, environmental policy decisions, or comparing the value of annuity payments over a stretched timeline. Therefore, when faced with project choices of varying lifespans, NPV stands out as the most reliable and effective analysis tool to assess comparative financial viability.