CEM Finance, Budgeting, and Contracts 5 — Questions and Answers
Question 1: 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?
- 7.5 years
- 10.7 years (Correct answer)
- 14.5 years
- 20.0 years
Correct answer: 10.7 years
Simple payback = $300,000 ÷ $28,000/year ≈ 10.7 years, which falls within the bond term.
Question 2: Which of the following best defines 'avoided cost' in the context of energy project financial analysis?
- The cost of energy purchased from an alternative supplier
- The energy expenditure that would have been incurred without the efficiency project (Correct answer)
- The penalty avoided by complying with demand response programs
- The reduction in equipment maintenance costs after a retrofit
Correct 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.
Question 3: When preparing a capital budget request for an energy project, which document most effectively communicates the project's financial merit to senior management?
- Equipment specification sheet
- Business case with NPV, IRR, and payback analysis (Correct answer)
- Utility billing history spreadsheet
- ASHRAE energy audit Level I report
Correct 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.
Question 4: What is the key distinction between an operating lease and a capital lease for energy equipment?
- Operating leases always have lower monthly payments than capital leases
- Capital leases appear on the balance sheet as both an asset and a liability, while operating leases do not (Correct answer)
- Operating leases grant ownership at the end of the term automatically
- Capital leases require no down payment
Correct 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.
Question 5: 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?
- $2,250
- $4,500 (Correct answer)
- $6,750
- $9,000
Correct answer: $4,500
Savings per kWh shifted = $0.18 − $0.09 = $0.09; monthly savings = 50,000 kWh × $0.09/kWh = $4,500.
Question 6: In an energy audit report submitted to support a capital funding request, what is the role of the 'implementation cost' figure?
- It determines the utility's avoided cost baseline
- It is the denominator used to calculate simple payback and return on investment (Correct answer)
- It sets the maximum allowable operating budget for the project
- It establishes the contractor's profit margin in the contract
Correct 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.
Question 7: Which financial risk is most commonly transferred to an ESCO through a guaranteed savings performance contract?
- Fuel price escalation risk
- Technology performance and energy savings shortfall risk (Correct answer)
- Interest rate risk on project financing
- Regulatory compliance risk
Correct 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.
CEM Finance, Budgeting, and Contracts 5
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?