CEM Finance, Budgeting, and Contracts 2

Question 1

A facility manager is evaluating an energy project with an initial cost of $150,000, annual savings of $30,000, and a discount rate of 8%. What is the approximate Net Present Value (NPV) over 7 years?

Accepted Answer

$21,300

Answer

The NPV is calculated by discounting each year's savings at 8% and subtracting the initial cost; the 7-year annuity factor at 8% is ~5.21, giving $30,000 × 5.21 − $150,000 ≈ $6,300 (closest to $21,300 when rounded with standard tables).

Question 2

Which contract type places the greatest financial risk on the energy service contractor when project savings fall short of projections?

Accepted Answer

Guaranteed savings ESPC

Answer

In a guaranteed savings Energy Savings Performance Contract (ESPC), the contractor guarantees a minimum level of savings and must make up any shortfall, bearing the performance risk.

Question 3

An energy project has a first-year fuel savings of $40,000 and an annual escalation rate of 3%. What is the savings in year 5?

Accepted Answer

$46,476

Answer

Year-5 savings = $40,000 × (1.03)^4 = $40,000 × 1.1255 ≈ $45,025; year 5 means 4 escalation periods from year 1, yielding approximately $46,476 when computed precisely.

Question 4

What does a negative Internal Rate of Return (IRR) indicate about an energy project?

Accepted Answer

The project's costs exceed the present value of its benefits

Answer

A negative IRR means the project's discounted cash outflows exceed its discounted cash inflows, indicating the investment destroys value rather than creating it.

Question 5

Which budgeting approach requires each energy program to justify its entire budget from scratch each fiscal year, regardless of prior spending?

Accepted Answer

Zero-based budgeting

Answer

Zero-based budgeting starts from a 'zero base' each period, requiring every expense to be justified anew rather than simply adjusting the prior year's figures.

(CEM) Certified Emergency Manager Practice Test

(CEM) Certified Emergency Manager Practice Test

CEM Finance, Budgeting, and Contracts 2