Economic Analysis and Financing Flashcards
7 cards from real Certified Energy Auditor Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Economic Analysis and Financing flashcards as text
A commercial building owner is evaluating an LED lighting retrofit. The owner's cost of capital is 8% and the project's IRR is 11%. What conclusion can be drawn?
Answer: The project adds value because IRR exceeds the minimum required return
When IRR exceeds the cost of capital (hurdle rate), the project generates returns above the minimum threshold and creates economic value.
What is the purpose of sensitivity analysis in energy project economic evaluation?
Answer: To assess how changes in key assumptions affect project outcomes
Sensitivity analysis tests how variations in inputs like energy prices, discount rates, or savings magnitude affect metrics like NPV or IRR.
Which of the following best describes a 'shared savings' Energy Savings Performance Contract?
Answer: The building owner and ESCO split the energy savings according to a predetermined ratio
In a shared savings ESPC, the building owner and ESCO split the verified energy cost savings according to a negotiated percentage split throughout the contract term.
How does inflation generally affect the real value of fixed annual energy savings over the life of a project?
Answer: Inflation decreases the real purchasing power of fixed nominal savings
If energy savings are fixed in nominal terms, inflation erodes their real purchasing power over time, reducing the real economic benefit.
An auditor calculates the adjusted internal rate of return (AIRR) rather than the standard IRR for a project. What problem does AIRR solve that IRR cannot?
Answer: AIRR eliminates the issue of multiple IRR solutions in non-conventional cash flow streams
Projects with non-conventional cash flows (multiple sign changes) can yield multiple IRRs; AIRR resolves this by using a single reinvestment rate assumption.
A municipality wants to finance energy upgrades using a tax-exempt bond. What is the primary benefit of tax-exempt financing for energy projects?
Answer: Interest paid on the bonds is exempt from federal income tax, allowing lower interest rates
Tax-exempt municipal bonds carry lower interest rates because investors accept a lower yield in exchange for the federal tax exemption on interest income.
When calculating the net present value of an energy retrofit, which of the following represents a 'residual value' consideration at the end of the analysis period?
Answer: The remaining economic value of equipment that outlasts the study period
Residual (salvage) value represents the remaining worth of equipment at the end of the analysis period and is included as a positive cash flow in LCC calculations.