Finance, Budgeting, and Contracts Flashcards

A building undergoes an energy retrofit funded by a $300,000 bond with a 20-year term at 5% interest. Annual energy savings are $28,000. What is the approximate simple payback on the bond principal alone?

Answer: 10.7 years

Simple payback = $300,000 ÷ $28,000/year ≈ 10.7 years, which falls within the bond term.

Which of the following best defines 'avoided cost' in the context of energy project financial analysis?

Answer: The energy expenditure that would have been incurred without the efficiency project

Avoided cost is the baseline energy spending that would have occurred in the absence of the project, used as the benefit against which project costs are compared.

When preparing a capital budget request for an energy project, which document most effectively communicates the project's financial merit to senior management?

Answer: Business case with NPV, IRR, and payback analysis

A business case that includes NPV, IRR, and payback period translates technical energy savings into financial terms that executives use to compare and prioritize capital investments.

What is the key distinction between an operating lease and a capital lease for energy equipment?

Answer: Capital leases appear on the balance sheet as both an asset and a liability, while operating leases do not

Under accounting standards, a capital (finance) lease transfers ownership risks and rewards to the lessee, requiring recognition of both an asset and a corresponding liability on the balance sheet.

A utility offers a time-of-use (TOU) rate with on-peak energy at $0.18/kWh and off-peak at $0.09/kWh. A load-shifting project moves 50,000 kWh/month from on-peak to off-peak. What are the monthly savings?

Answer: $4,500

Savings per kWh shifted = $0.18 − $0.09 = $0.09; monthly savings = 50,000 kWh × $0.09/kWh = $4,500.

In an energy audit report submitted to support a capital funding request, what is the role of the 'implementation cost' figure?

Answer: It is the denominator used to calculate simple payback and return on investment

Implementation cost (the total project investment) serves as the denominator in payback (Cost ÷ Savings) and ROI calculations, directly affecting how attractive the project appears to decision-makers.

Which financial risk is most commonly transferred to an ESCO through a guaranteed savings performance contract?

Answer: Technology performance and energy savings shortfall risk

In a guaranteed savings ESPC, the ESCO assumes the risk that installed measures will underperform and must compensate the owner if savings fall below the guaranteed level.