Certified Energy Auditor Certification Economic Analysis of Projects 5 — Questions and Answers
Question 1: In a sensitivity analysis for an energy retrofit project, which variable typically has the greatest impact on project NPV?
- Equipment color and finish specification
- Energy price escalation rate (Correct answer)
- Project manager's hourly rate
- Number of floors in the building
Correct answer: Energy price escalation rate
Energy price escalation rate has a compounding effect over the project life and often dominates sensitivity analysis results for energy projects.
Question 2: A performance contract (ESPC) shifts the financial risk of energy savings shortfalls to the:
- Building owner
- Local utility
- Energy Service Company (ESCO) (Correct answer)
- Federal government
Correct answer: Energy Service Company (ESCO)
In an Energy Savings Performance Contract, the ESCO guarantees the projected savings and absorbs the financial risk if actual savings fall short.
Question 3: When evaluating a portfolio of energy projects with limited capital, the economically optimal strategy is to:
- Fund the project with the longest payback first
- Rank projects by NPV alone and fund top projects until budget is exhausted
- Rank projects by SIR and fund the highest-SIR projects first (Correct answer)
- Fund only projects with an IRR above 25%
Correct answer: Rank projects by SIR and fund the highest-SIR projects first
Ranking by SIR maximizes total present-value savings per dollar invested when capital is constrained, following FEMP and ASTM guidelines.
Question 4: The economic life of equipment used in LCC analysis is best defined as:
- The physical life until the equipment fails completely
- The manufacturer's warranty period
- The period over which the equipment provides net positive savings versus the next-best alternative (Correct answer)
- The IRS-mandated MACRS depreciation life
Correct answer: The period over which the equipment provides net positive savings versus the next-best alternative
Economic life ends when operating, maintenance, and replacement costs make retaining the equipment less favorable than replacing it with a better alternative.
Question 5: Measurement and Verification (M&V) costs should be included in a project's economic analysis because:
- They are required by state energy codes
- They are a real project cost that reduces net savings and affects all economic metrics (Correct answer)
- They replace the need for engineering estimates
- They are always reimbursed by the utility
Correct answer: They are a real project cost that reduces net savings and affects all economic metrics
M&V costs are legitimate project expenses that reduce net savings and must be included in NPV, IRR, and payback calculations for accurate economic assessment.
Question 6: An energy project financed through a $500,000 tax-exempt municipal bond at 4% interest will have a lower effective capital cost than the same project financed at a 7% corporate rate because:
- Municipal bonds have shorter repayment terms
- The lower interest rate reduces annual debt service, improving cash flow and project economics (Correct answer)
- Tax-exempt bonds require no principal repayment
- Corporate bonds are subject to utility surcharges
Correct answer: The lower interest rate reduces annual debt service, improving cash flow and project economics
Lower interest rates reduce annual debt service payments, increasing net annual cash flow from the project and improving economic metrics like NPV and cash-on-cash return.
Question 7: A thorough economic analysis should account for 'rebound effect' (also called take-back effect) because it:
- Increases projected energy savings beyond engineering estimates
- Means occupants may increase energy use after efficiency improvements, reducing net savings (Correct answer)
- Eliminates the need for sensitivity analysis
- Automatically improves the project's IRR
Correct answer: Means occupants may increase energy use after efficiency improvements, reducing net savings
The rebound effect occurs when efficiency improvements lead to behavioral changes that increase energy use (e.g., keeping spaces warmer because heating is cheaper), reducing actual net savings.
Certified Energy Auditor Certification Economic Analysis of Projects 5
In a sensitivity analysis for an energy retrofit project, which variable typically has the greatest impact on project NPV?