Two mutually exclusive projects have the cash flows below. For the NPV comparison in this adaptation, use a common discount rate of 10%.
| Year | A (€) | B (€) |
|---|---|---|
| 0 | -2,000 | -2,000 |
| 1 | 500 | 500 |
| 2 | 700 | 700 |
| 3 | 800 | 800 |
| 4 | 0 | 5,000 |
Both investments pay back at the end of year 3.
No. B has the same early cash flows and an additional €5,000 in year 4, which payback ignores.
| Project | NPV at 10% (€) |
|---|---|
| A | -365.89 |
| B | 3,049.18 |
B is better at any finite common discount rate greater than −100%, because its only incremental cash flow is positive.
The rule accepts projects whose payback is within a specified cutoff, which may be shorter than the project’s life. There is no universal cutoff equal to project life. Ordinary payback ignores the time value of money and cash flows after recovery, so it can reject valuable projects or accept negative-NPV ones.