Certified Energy Auditor Certification Economic Analysis and Financing 3 — Questions and Answers
Question 1: Which economic analysis method accounts for the time value of money and is most appropriate for comparing projects with different lifespans?
- Simple payback period
- Life-cycle cost analysis (LCCA) (Correct answer)
- Return on assets (ROA)
- Gross margin analysis
Correct answer: Life-cycle cost analysis (LCCA)
LCCA discounts all future costs and savings to present value, making it suitable for comparing projects with varying lifespans and cash flow profiles.
Question 2: What is the effect of a higher discount rate on the Net Present Value of an energy efficiency project?
- NPV increases because future savings are worth more
- NPV decreases because future savings are discounted more heavily (Correct answer)
- NPV is unaffected since it measures absolute savings
- NPV increases because capital costs are reduced
Correct answer: NPV decreases because future savings are discounted more heavily
A higher discount rate reduces the present value of future savings more aggressively, lowering the project's NPV.
Question 3: An organization wants to pursue multiple energy projects but has limited capital. Which economic metric is best for ranking projects to maximize value within a budget constraint?
- Simple payback period
- Net Present Value (NPV)
- Savings-to-Investment Ratio (SIR) (Correct answer)
- Gross energy savings in MMBtu
Correct answer: Savings-to-Investment Ratio (SIR)
SIR (or BCR) ranks projects by return per dollar invested, making it ideal for capital rationing when budget is constrained.
Question 4: What does 'modified accelerated cost recovery system (MACRS)' refer to in the context of energy project financing?
- A method for calculating energy savings over time
- A U.S. federal depreciation schedule that affects after-tax project economics (Correct answer)
- A utility rebate program for commercial buildings
- A protocol for measuring and verifying energy performance
Correct answer: A U.S. federal depreciation schedule that affects after-tax project economics
MACRS is the IRS depreciation schedule that determines how quickly capital equipment can be written off, improving after-tax cash flows for energy projects.
Question 5: In a lease financing arrangement for energy equipment, who typically owns the equipment during the lease term?
- The building owner
- The lessor (financing company) (Correct answer)
- The utility company
- The state energy office
Correct answer: The lessor (financing company)
In a lease, the lessor retains ownership of the equipment while the lessee (building owner) makes periodic payments and uses the equipment.
Question 6: Which of the following best describes 'on-bill financing' for energy efficiency upgrades?
- The utility pays for upgrades in exchange for a share of savings
- The project cost is repaid through a charge added to the customer's utility bill (Correct answer)
- The building owner receives a lump-sum rebate applied to the energy bill
- The ESCO finances the project and collects payment through energy sales
Correct answer: The project cost is repaid through a charge added to the customer's utility bill
On-bill financing allows customers to repay energy efficiency loans through their monthly utility bills, often with no upfront cost.
Question 7: What is the primary purpose of an investment-grade energy audit (IGA) in the context of project financing?
- To satisfy ASHRAE Standard 90.1 compliance requirements
- To provide sufficiently detailed savings estimates for lenders and ESCOs to finance a project (Correct answer)
- To calculate the MACRS depreciation schedule for tax purposes
- To determine the building's ENERGY STAR score
Correct answer: To provide sufficiently detailed savings estimates for lenders and ESCOs to finance a project
An IGA produces the detailed engineering and financial analysis that lenders and ESCOs require to confidently underwrite energy performance contracts.
Certified Energy Auditor Certification Economic Analysis and Financing 3
Which economic analysis method accounts for the time value of money and is most appropriate for comparing projects with different lifespans?