Pay back period method

          PBP for Project X = cost of project

Annual cash inflow

= 20000/4000 = 5 years

PBP for Project Y = 10000/4000 = 2.5 years

1st rank – project Y

2nd rank – project X

NPV Method

NPV for project  X

Annual cash inflow for project X = 4000

PV of total cash inflow = 4000 x 5.33

= 21334.4

                                      ========

NPV = Total cash inflow – PV of initial investment

= 21334.4 – 20000 = 1334.4

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Project Y

Annual cash inflow for project Y = 4000

PV of total cash inflow = 4000 x 3.79 = 15160

Less PV of initial investment            – 10000

NPV =                     5160

1st rank – Project Y

2nd rank – project X

Advantages

1. It considers the time value of money
2. It considers the earnings over the entire life of the project