CEM Finance, Budgeting, and Contracts 4 — Questions and Answers
Question 1: Which of the following best describes life-cycle costing (LCC) in energy project analysis?
- Evaluating only first-cost equipment purchase price
- Considering all costs over the project's useful life, including initial, operating, and disposal costs (Correct answer)
- Comparing energy costs to those of competing facilities
- Calculating the break-even point of energy sales to the grid
Correct 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.
Question 2: 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?
- $50,000
- $67,935 (Correct answer)
- $73,200
- $95,000
Correct answer: $67,935
Annual payment = Loan amount ÷ Annuity factor = $500,000 ÷ 7.36 ≈ $67,935.
Question 3: What is the effect of a higher discount rate on the Net Present Value of an energy efficiency project with long-term savings?
- NPV increases because future savings are worth more
- NPV decreases because future savings are discounted more heavily (Correct answer)
- NPV is unaffected since savings are fixed
- NPV increases because operating costs are reduced
Correct 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.
Question 4: In energy procurement contracts, what is a 'swing' tolerance provision?
- A penalty for late equipment delivery
- An allowable percentage range within which actual gas or power volumes can vary from contracted quantities without penalty (Correct answer)
- A clause permitting the buyer to switch suppliers mid-contract
- A requirement to balance supply and demand hourly
Correct 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.
Question 5: Which term describes the minimum monthly charge a customer must pay a utility regardless of actual energy consumption?
- Coincident demand charge
- Customer charge (Correct answer)
- Transmission access fee
- Interruptible credit
Correct 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.
Question 6: An energy manager uses a 'sensitivity analysis' when evaluating a capital project. What is the primary purpose of this technique?
- To determine the optimal financing structure
- To assess how changes in key assumptions (e.g., energy prices, savings) affect project economics (Correct answer)
- To calculate the exact payback period under guaranteed conditions
- To negotiate better equipment purchase prices
Correct 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.
Question 7: Under a 'take-or-pay' energy supply contract, what obligation does the buyer face if they do not consume the minimum contracted volume?
- The contract is automatically terminated
- The buyer must pay for the minimum volume regardless of actual consumption (Correct answer)
- The supplier must refund the difference
- The buyer receives credit for future billing periods
Correct 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.
CEM Finance, Budgeting, and Contracts 4
Which of the following best describes life-cycle costing (LCC) in energy project analysis?