CEM Finance, Budgeting, and Contracts 3

Question 1

An energy manager is comparing two projects. Project A has an IRR of 14% and Project B has an IRR of 11%. The company's hurdle rate is 12%. Which project(s) should be approved?

Accepted Answer

Only Project A

Answer

Projects are acceptable when their IRR exceeds the hurdle rate; Project A (14% > 12%) qualifies, but Project B (11% < 12%) does not.

Question 2

In a shared-savings ESPC arrangement, how are the energy cost savings typically split between the owner and the ESCO?

Accepted Answer

Savings are split by a pre-negotiated percentage throughout the contract term

Answer

In a shared-savings ESPC, the owner and ESCO divide energy cost savings by a pre-agreed percentage (e.g., 60/40) for the duration of the contract.

Question 3

Which financial metric is most appropriate for ranking multiple independent energy projects when capital is limited?

Accepted Answer

Profitability Index

Answer

The Profitability Index (NPV divided by initial investment) ranks projects by value created per dollar invested, making it ideal for capital rationing decisions.

Question 4

A utility tariff includes a ratchet clause set at 85% of the previous 11 months' peak demand. If the highest recorded peak was 1,000 kW and the current month's actual peak is 700 kW, what demand is billed?

Accepted Answer

850 kW

Answer

The ratchet demand = 85% × 1,000 kW = 850 kW, which exceeds the actual 700 kW, so the facility is billed for 850 kW.

Question 5

Which type of contract clause protects an energy buyer from unexpected fuel price increases by allowing cost adjustments tied to a published index?

Accepted Answer

Escalation clause

Answer

An escalation clause links contract prices to a recognized index (such as the CPI or a fuel price index), automatically adjusting costs when the index changes.

(CEM) Certified Emergency Manager Practice Test

(CEM) Certified Emergency Manager Practice Test

CEM Finance, Budgeting, and Contracts 3