CEA Financial Analysis & Energy Project Economics Flashcards

What is the purpose of life-cycle cost analysis (LCCA) in energy project evaluation?

Answer: To evaluate total costs including initial, operating, and maintenance costs over the project lifetime

LCCA considers all costs over the project's lifespan—capital, operating, maintenance, and end-of-life—to determine the most cost-effective option.

Which of the following best describes an Energy Savings Performance Contract (ESPC)?

Answer: A contract where an ESCO guarantees energy savings sufficient to repay project costs

In an ESPC, an Energy Service Company (ESCO) guarantees that energy savings will cover the project's financing costs, shifting performance risk from the owner.

When comparing energy efficiency measures with different lifespans, which metric is most appropriate?

Answer: Savings-to-Investment Ratio (SIR)

The Savings-to-Investment Ratio (SIR) accounts for different measure lifespans by comparing the present value of savings to the present value of costs.

What is the Modified Accelerated Cost Recovery System (MACRS) used for in energy projects?

Answer: Determining depreciation schedules for tax purposes on energy equipment

MACRS is the IRS depreciation method that allows businesses to recover the cost of energy equipment over a specified number of years for tax purposes.

A project has an IRR of 15% and the company's hurdle rate is 12%. What does this indicate?

Answer: The project is financially viable and exceeds the minimum required return

When IRR exceeds the hurdle rate, the project generates returns above the minimum acceptable threshold, making it financially attractive.

Which cost is considered an 'avoided cost' in energy project financial analysis?

Answer: Energy expenditures that would have been incurred without the improvement

Avoided costs are the energy expenses eliminated by the efficiency measure—what the facility would have paid without the improvement.