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Energy Economics and Financial Analysis Flashcards

7 cards from real CEM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Energy Economics and Financial Analysis flashcards as text

  1. A lighting retrofit costs $50,000 and saves $10,000 per year in energy costs. What is the simple payback period?

    Answer: 5 years

    Simple payback period = Initial investment / Annual savings = $50,000 / $10,000 = 5 years.

  2. Which statement about Net Present Value (NPV) is correct when evaluating energy projects?

    Answer: A positive NPV indicates the project generates more value than its cost of capital

    A positive NPV means the present value of cash inflows exceeds the present value of costs, indicating the project creates value above the required return.

  3. In energy project financial analysis, the discount rate is used to:

    Answer: Convert future cash flows to present value

    The discount rate reflects the time value of money by converting future cash flows into their equivalent present-day value.

  4. Life Cycle Cost (LCC) analysis differs from simple payback analysis primarily because LCC:

    Answer: Accounts for all costs over the entire life of the equipment

    Life Cycle Cost analysis includes all costs over the equipment's lifetime: initial capital, operating, maintenance, energy, and disposal costs.

  5. The Internal Rate of Return (IRR) of an energy project is best defined as:

    Answer: The discount rate at which the NPV equals zero

    IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero, representing the project's effective rate of return.

  6. An energy project analysis uses a 3% annual energy cost escalation rate and a 6% nominal discount rate. The approximate 'real' discount rate is:

    Answer: 2.9%

    Real discount rate ≈ (1 + nominal rate)/(1 + escalation rate) − 1 = (1.06/1.03) − 1 ≈ 2.91%, accounting for the offsetting effect of energy price inflation.

  7. An energy conservation measure has a Benefit-Cost Ratio (BCR) of 1.8. This means:

    Answer: For every dollar invested, $1.80 in present value benefits are generated

    A BCR of 1.8 means the present value of benefits is 1.8 times the present value of costs, so each dollar invested returns $1.80 in benefits.