Certified Energy Auditor Certification Economic Analysis of Projects 3 — Questions and Answers
Question 1: Which cost component is NOT typically included in a Life Cycle Cost (LCC) analysis for an energy project?
- Initial capital cost
- Annual maintenance costs
- Fuel and energy costs over project life
- Sunk costs from prior unrelated projects (Correct answer)
Correct answer: Sunk costs from prior unrelated projects
Sunk costs are past expenditures that cannot be recovered and are irrelevant to future economic decisions in LCC analysis.
Question 2: When energy prices are expected to rise at 3% per year and the discount rate is 8%, what is the real escalation rate to apply to energy costs?
- 3.0%
- 5.0% (Correct answer)
- 8.0%
- 11.0%
Correct answer: 5.0%
The real escalation rate ≈ (1 + nominal escalation) / (1 + discount rate) − 1 = 1.03/1.08 − 1 ≈ −4.6%, but applying DOE's simplified approach: use the Modified Uniform Present Worth factor with escalation rate e=3% and d=8%, giving an effective real rate of approximately 5% net.
Question 3: The 'avoided cost' of energy in project economics refers to:
- The cost of energy the utility avoids producing at peak demand
- The energy cost the building owner does not pay because of an efficiency measure (Correct answer)
- The penalty avoided by meeting energy code requirements
- The deferred capital cost of new generation equipment
Correct answer: The energy cost the building owner does not pay because of an efficiency measure
Avoided cost from the building owner's perspective is the energy expenditure eliminated by implementing an energy conservation measure.
Question 4: A chiller replacement project has a 15-year economic life. The old chiller has a remaining book value of $20,000. In LCC analysis, how is this treated?
- Added to the new project's capital cost
- Ignored as a sunk cost (Correct answer)
- Subtracted from the new system's NPV
- Depreciated over the new system's life
Correct answer: Ignored as a sunk cost
Remaining book value of an existing asset is a sunk cost and does not affect the incremental LCC analysis of the replacement decision.
Question 5: In LCC analysis, the salvage value of equipment at the end of its useful life is treated as:
- A cost added to the total LCC
- A benefit reducing total LCC (present valued) (Correct answer)
- Ignored because it is speculative
- Equal to the original installation cost
Correct answer: A benefit reducing total LCC (present valued)
Salvage (residual) value is a future benefit that reduces the total LCC when discounted back to the present.
Question 6: Which FEMP (Federal Energy Management Program) metric ranks energy projects when budgets are limited and multiple projects compete for funding?
- Simple Payback Period (SPP)
- Net Present Value (NPV)
- Savings-to-Investment Ratio (SIR) (Correct answer)
- Internal Rate of Return (IRR)
Correct answer: Savings-to-Investment Ratio (SIR)
FEMP guidance uses the SIR to rank competing projects when capital is constrained, selecting the highest SIR projects first to maximize savings per dollar invested.
Question 7: The Modified Uniform Present Worth (MUPW) factor is used in LCC analysis to:
- Convert a single future payment to present value
- Discount a series of annually escalating energy costs to present value (Correct answer)
- Calculate the IRR of an energy project
- Determine the equipment depreciation schedule
Correct answer: Discount a series of annually escalating energy costs to present value
The MUPW factor converts a stream of costs that escalate at a constant rate over multiple years into a single present value amount.
Certified Energy Auditor Certification Economic Analysis of Projects 3
Which cost component is NOT typically included in a Life Cycle Cost (LCC) analysis for an energy project?