CEA CEA Financial Analysis & Energy Project Economics 2 — Questions and Answers
Question 1: What is the purpose of life-cycle cost analysis (LCCA) in energy project evaluation?
- To calculate only the upfront capital cost
- To evaluate total costs including initial, operating, and maintenance costs over the project lifetime (Correct answer)
- To determine the best utility rate schedule
- To measure carbon emissions over time
Correct answer: To evaluate total costs including initial, operating, and maintenance costs over the project lifetime
LCCA considers all costs over the project's lifespan—capital, operating, maintenance, and end-of-life—to determine the most cost-effective option.
Question 2: Which of the following best describes an Energy Savings Performance Contract (ESPC)?
- A utility program that rebates energy-efficient equipment purchases
- A contract where an ESCO guarantees energy savings sufficient to repay project costs (Correct answer)
- A fixed-price energy supply agreement with a utility
- A government grant requiring no repayment
Correct answer: A contract where an ESCO guarantees energy savings sufficient to repay project costs
In an ESPC, an Energy Service Company (ESCO) guarantees that energy savings will cover the project's financing costs, shifting performance risk from the owner.
Question 3: When comparing energy efficiency measures with different lifespans, which metric is most appropriate?
- Simple payback period
- Savings-to-Investment Ratio (SIR) (Correct answer)
- Gross annual savings
- Peak demand reduction
Correct answer: Savings-to-Investment Ratio (SIR)
The Savings-to-Investment Ratio (SIR) accounts for different measure lifespans by comparing the present value of savings to the present value of costs.
Question 4: What is the Modified Accelerated Cost Recovery System (MACRS) used for in energy projects?
- Calculating energy savings verification
- Determining depreciation schedules for tax purposes on energy equipment (Correct answer)
- Measuring peak demand charges
- Benchmarking building energy performance
Correct answer: Determining depreciation schedules for tax purposes on energy equipment
MACRS is the IRS depreciation method that allows businesses to recover the cost of energy equipment over a specified number of years for tax purposes.
Question 5: A project has an IRR of 15% and the company's hurdle rate is 12%. What does this indicate?
- The project should be rejected
- The project is financially viable and exceeds the minimum required return (Correct answer)
- The project breaks even exactly
- The payback period is 15 years
Correct answer: The project is financially viable and exceeds the minimum required return
When IRR exceeds the hurdle rate, the project generates returns above the minimum acceptable threshold, making it financially attractive.
Question 6: Which cost is considered an 'avoided cost' in energy project financial analysis?
- Capital cost of new equipment
- Operation and maintenance expenses of new systems
- Energy expenditures that would have been incurred without the improvement (Correct answer)
- Engineering and design fees
Correct answer: Energy expenditures that would have been incurred without the improvement
Avoided costs are the energy expenses eliminated by the efficiency measure—what the facility would have paid without the improvement.
CEA CEA Financial Analysis & Energy Project Economics 2
What is the purpose of life-cycle cost analysis (LCCA) in energy project evaluation?