Certified Energy Auditor Certification Economic Analysis of Projects 2 — Questions and Answers
Question 1: A project has an NPV of $0 when discounted at 12%. What does this indicate?
- The project generates no savings
- The project's IRR equals exactly 12% (Correct answer)
- The project should be rejected
- The project payback is 12 years
Correct answer: The project's IRR equals exactly 12%
When NPV equals zero at a given discount rate, that rate is by definition the Internal Rate of Return (IRR).
Question 2: A company requires a minimum acceptable rate of return (MARR) of 15%. An energy project has an IRR of 13%. What is the correct decision?
- Accept the project because IRR is positive
- Reject the project because IRR is below MARR (Correct answer)
- Accept the project if payback is under 5 years
- Recalculate using a lower discount rate
Correct answer: Reject the project because IRR is below MARR
A project should be rejected when its IRR falls below the company's Minimum Acceptable Rate of Return (MARR).
Question 3: Which factor most significantly affects the selection of a discount rate for a public sector energy project analysis?
- Local utility electricity price
- Federal OMB guidance or agency cost of capital (Correct answer)
- Equipment manufacturer warranty period
- State energy code requirements
Correct answer: Federal OMB guidance or agency cost of capital
For public sector projects, the Office of Management and Budget (OMB) provides discount rate guidance that agencies are typically required to follow.
Question 4: If $10,000 is invested today at an annual discount rate of 8%, what is its approximate present value in 5 years' time?
- $10,000 — present value equals face value
- $14,693 — future value, not present value
- $6,806 — present value of a future amount (Correct answer)
- $8,000 — simple interest result
Correct answer: $6,806 — present value of a future amount
The present value of $10,000 received in 5 years at 8% is PV = 10,000 / (1.08)^5 ≈ $6,806.
Question 5: The Discounted Payback Period (DPP) is always _______ the Simple Payback Period (SPP) for the same project.
- Equal to
- Shorter than
- Longer than (Correct answer)
- Unrelated to
Correct answer: Longer than
Discounting reduces the value of future savings, so it takes longer to recover the investment when using DPP versus SPP.
Question 6: The Benefit-Cost Ratio (BCR) for an energy project is calculated as:
- Annual savings divided by installed cost
- Present value of benefits divided by present value of costs (Correct answer)
- Total lifetime savings minus total costs
- IRR divided by the discount rate
Correct answer: Present value of benefits divided by present value of costs
BCR = PV of benefits / PV of costs; a ratio above 1.0 indicates the project is economically justified.
Question 7: A project has a Savings-to-Investment Ratio (SIR) of 2.4. What does this mean?
- The project saves $2.40 for every $1.00 of operating cost
- Every dollar invested returns $2.40 in present-value savings (Correct answer)
- The project payback is 2.4 years
- The IRR is 2.4 times the discount rate
Correct answer: Every dollar invested returns $2.40 in present-value savings
An SIR of 2.4 means the present value of net savings is $2.40 for every $1.00 of investment cost, indicating a highly favorable project.
Certified Energy Auditor Certification Economic Analysis of Projects 2
A project has an NPV of $0 when discounted at 12%.
What does this indicate?