CEA CEA Financial Analysis & Energy Project Economics 1 — Questions and Answers
Question 1: Which financial metric represents the ratio of annual energy cost savings to the total initial investment for an energy project?
- Simple payback period
- Return on investment (ROI) (Correct answer)
- Net present value (NPV)
- Internal rate of return (IRR)
Correct answer: Return on investment (ROI)
Return on investment (ROI) is calculated as annual savings divided by total investment, expressed as a percentage.
Question 2: A lighting retrofit costs $50,000 and saves $12,500 per year in electricity. What is the simple payback period?
- 2 years
- 4 years (Correct answer)
- 6 years
- 8 years
Correct answer: 4 years
Simple payback = Initial cost / Annual savings = $50,000 / $12,500 = 4 years.
Question 3: Which discount rate concept is used in life-cycle cost analysis to account for the time value of money?
- Inflation rate
- Federal funds rate
- Discount rate (Correct answer)
- Prime rate
Correct answer: Discount rate
The discount rate converts future cash flows to present value, reflecting the time value of money in life-cycle cost analysis.
Question 4: What does a positive Net Present Value (NPV) indicate about an energy project?
- The project will never pay back
- The project generates more value than its cost over the analysis period (Correct answer)
- The project has a short payback period only
- The project has zero risk
Correct answer: The project generates more value than its cost over the analysis period
A positive NPV means the discounted future savings exceed the initial investment, indicating the project adds financial value.
Question 5: Which federal incentive allows businesses to deduct a percentage of the cost of qualifying energy-efficient commercial building improvements?
- Investment Tax Credit (ITC)
- Section 179D deduction (Correct answer)
- Production Tax Credit (PTC)
- MACRS depreciation
Correct answer: Section 179D deduction
Section 179D of the Internal Revenue Code provides a tax deduction for energy-efficient improvements to commercial buildings.
Question 6: In energy project financing, what is a Power Purchase Agreement (PPA)?
- A utility rate schedule for large commercial customers
- A contract where a third party installs and owns equipment and sells energy output to the host (Correct answer)
- A government grant for renewable energy installations
- A loan agreement for energy efficiency upgrades
Correct answer: A contract where a third party installs and owns equipment and sells energy output to the host
A PPA is a financial arrangement where a developer installs, owns, and operates energy equipment on a customer's site and sells the electricity to the customer at a contracted rate.
CEA CEA Financial Analysis & Energy Project Economics 1
Which financial metric represents the ratio of annual energy cost savings to the total initial investment for an energy project?