Certified Energy Auditor Certification Certified Energy Auditor Economic Analysis of Projects Questions and Answers 2 — Questions and Answers
Question 1: An energy auditor is comparing two lighting retrofit options. Option A costs $12,000 with annual savings of $3,600, and Option B costs $18,000 with annual savings of $5,000. Using simple payback period, which option pays back faster?
- Option A at 3.33 years (Correct answer)
- Option B at 3.60 years
- Both have the same payback period
- Neither option is economically viable
Correct answer: Option A at 3.33 years
Simple payback is calculated as cost divided by annual savings; Option A is $12,000/$3,600 = 3.33 years versus Option B at $18,000/$5,000 = 3.60 years.
Question 2: What is the primary limitation of using simple payback period as the sole criterion for evaluating energy conservation measures?
- It ignores the time value of money and savings beyond the payback period (Correct answer)
- It requires too much data to calculate accurately
- It overestimates the value of long-term projects
- It cannot be applied to lighting upgrades
Correct answer: It ignores the time value of money and savings beyond the payback period
Simple payback period does not account for the time value of money, discount rates, or any savings that occur after the investment is recovered.
Question 3: A facility is evaluating an HVAC upgrade with an initial cost of $50,000, annual energy savings of $8,000, and a useful life of 12 years. Using a discount rate of 6%, what financial metric best captures the total economic value over the project life?
- Net Present Value (Correct answer)
- Simple payback period
- Return on investment percentage
- Average annual cost
Correct answer: Net Present Value
Net Present Value discounts all future cash flows to present dollars and accounts for the full project life, making it the most comprehensive economic metric.
Question 4: When calculating the Savings-to-Investment Ratio (SIR) for an energy project, what does a ratio greater than 1.0 indicate?
- The present value of savings exceeds the present value of costs (Correct answer)
- The project will pay for itself within one year
- The annual savings equal the initial investment
- The project has no associated maintenance costs
Correct answer: The present value of savings exceeds the present value of costs
An SIR greater than 1.0 means the discounted lifetime savings are greater than the discounted total investment costs, indicating a cost-effective project.
Question 5: In a life cycle cost analysis for an energy conservation measure, which of the following costs should be included?
- Initial cost, annual energy savings, maintenance costs, and replacement costs (Correct answer)
- Only the initial installation cost and energy savings
- Only costs occurring within the simple payback period
- Initial cost and first-year energy savings only
Correct answer: Initial cost, annual energy savings, maintenance costs, and replacement costs
Life cycle cost analysis encompasses all costs and savings over the entire useful life of a measure, including initial, operating, maintenance, and replacement costs.
Question 6: An energy auditor must choose between two boiler replacements. Both have the same net present value, but Project X has an internal rate of return of 18% while Project Y has an IRR of 12%. What does this difference indicate?
- Project X generates a higher return per dollar invested (Correct answer)
- Project Y has lower initial costs
- Project X has a longer useful life
- Both projects are equally attractive investments
Correct answer: Project X generates a higher return per dollar invested
A higher IRR means the project earns a greater percentage return on the invested capital, making Project X more efficient per dollar spent even though total NPV is equal.
Certified Energy Auditor Certification Certified Energy Auditor Economic Analysis of Projects Questions and Answers 2
An energy auditor is comparing two lighting retrofit options.
Option A costs $12,000 with annual savings of $3,600, and Option B costs $18,000 with annual savings of $5,000.
Using simple payback period, which option pays back faster?