Finance, Budgeting, and Contracts Flashcards

Which of the following best describes life-cycle costing (LCC) in energy project analysis?

Answer: Considering all costs over the project's useful life, including initial, operating, and disposal costs

Life-cycle costing accounts for every cost associated with an asset from acquisition through disposal, giving a complete economic picture rather than focusing only on purchase price.

A company finances an energy project with a $500,000 loan at 6% annual interest over 10 years. Using an annuity factor of 7.36, what is the approximate annual debt service payment?

Answer: $67,935

Annual payment = Loan amount ÷ Annuity factor = $500,000 ÷ 7.36 ≈ $67,935.

What is the effect of a higher discount rate on the Net Present Value of an energy efficiency project with long-term savings?

Answer: NPV decreases because future savings are discounted more heavily

A higher discount rate reduces the present value of future cash flows, lowering the NPV and making long-payback projects less attractive.

In energy procurement contracts, what is a 'swing' tolerance provision?

Answer: An allowable percentage range within which actual gas or power volumes can vary from contracted quantities without penalty

A swing tolerance defines how much a buyer's actual consumption can deviate (e.g., ±10%) from the contracted volume before incurring imbalance penalties.

Which term describes the minimum monthly charge a customer must pay a utility regardless of actual energy consumption?

Answer: Customer charge

The customer charge (or service charge) is a fixed monthly fee that covers the utility's fixed infrastructure costs regardless of how much energy the customer uses.

An energy manager uses a 'sensitivity analysis' when evaluating a capital project. What is the primary purpose of this technique?

Answer: To assess how changes in key assumptions (e.g., energy prices, savings) affect project economics

Sensitivity analysis tests how the project's financial outcome changes as individual input variables (such as energy price or efficiency improvement) are varied, revealing which assumptions most affect viability.

Under a 'take-or-pay' energy supply contract, what obligation does the buyer face if they do not consume the minimum contracted volume?

Answer: The buyer must pay for the minimum volume regardless of actual consumption

Take-or-pay contracts require the buyer to either consume the minimum contracted quantity or pay for it anyway, protecting the supplier's revenue.