Certified Energy Auditor Certification Economic Analysis and Financing 4 — Questions and Answers
Question 1: A project has an initial cost of $200,000 and generates after-tax cash flows of $40,000 per year for 7 years with no salvage value. What is the approximate internal rate of return (IRR)?
- 12%
- 16% (Correct answer)
- 20%
- 8%
Correct answer: 16%
The IRR is approximately 16%, the discount rate at which the NPV of $40,000/yr for 7 years equals the $200,000 investment.
Question 2: Which factor does NOT directly affect the simple payback period calculation for an energy efficiency measure?
- Annual energy cost savings
- Initial installed cost
- Discount rate (Correct answer)
- Maintenance cost changes
Correct answer: Discount rate
Simple payback = cost ÷ annual net savings; the discount rate is not used in this calculation, only in time-value-adjusted methods.
Question 3: A utility offers a $25,000 rebate for installing a high-efficiency chiller that costs $150,000. How does this rebate affect the simple payback period calculation?
- It is ignored because it comes from a third party
- It reduces the net project cost to $125,000, shortening payback (Correct answer)
- It is treated as taxable income and excluded from savings
- It extends the payback period by increasing annual obligations
Correct answer: It reduces the net project cost to $125,000, shortening payback
Utility rebates reduce the net first cost of the project, directly shortening the payback period when used to offset the investment.
Question 4: What is 'fuel price escalation' and why is it important in energy economic analysis?
- The rate at which equipment efficiency degrades over time
- The projected annual increase in energy prices that affects future savings values (Correct answer)
- The penalty utilities charge for peak demand usage
- The cost increase associated with switching fuel types
Correct answer: The projected annual increase in energy prices that affects future savings values
Fuel price escalation accounts for anticipated increases in energy costs over time, which increases the real value of future energy savings in an LCC analysis.
Question 5: Under a Power Purchase Agreement (PPA) for solar energy, what does the building owner actually purchase?
- The solar panels and associated equipment
- The electricity generated by the solar system at a contracted rate (Correct answer)
- A share of the renewable energy credits (RECs) produced
- A maintenance contract for solar equipment they already own
Correct answer: The electricity generated by the solar system at a contracted rate
In a PPA, the building owner buys the electricity output at a fixed or escalating rate per kWh, while the PPA provider owns and maintains the equipment.
Question 6: What is the 'hurdle rate' in the context of capital budgeting for energy projects?
- The maximum payback period a project may have to be approved
- The minimum acceptable rate of return an investment must exceed to be approved (Correct answer)
- The threshold energy savings in kWh required for utility rebate eligibility
- The interest rate charged by the lender on an energy loan
Correct answer: The minimum acceptable rate of return an investment must exceed to be approved
The hurdle rate is the organization's minimum required IRR; projects must exceed this rate to be considered financially worthwhile.
Question 7: When performing a life-cycle cost analysis, which cost category would include the expense of disposing of old refrigerant when replacing a chiller?
- First cost
- Annual operating cost
- Residual value
- Non-recurring cost (Correct answer)
Correct answer: Non-recurring cost
Refrigerant disposal is a one-time expense that occurs at a specific point in the project life, classifying it as a non-recurring cost in the LCC framework.
Certified Energy Auditor Certification Economic Analysis and Financing 4
A project has an initial cost of $200,000 and generates after-tax cash flows of $40,000 per year for 7 years with no salvage value.
What is the approximate internal rate of return (IRR)?