NPV also represents value added . The value of the company will change by the NPV amount. Cash outflows are the costs and cash inflows are the benefits. Note that this rule is consistent with the goal of maximizing the value of the firm. The above assumes the cash flow at time 0 is negative and other cash flows are positive.
Cash flows can be positive or negative at any point in time, however.
To compute payback, find where the cumulative cash flow becomes positive. Both projects recover the initial investment in the third year. For independent projects the rule is to accept all projects which have a payback less than some predetermined number. For mutually exclusive projects, the rule is to accept the project with the shortest payback. Some companies use payback however.