CEM Finance, Budgeting, and Contracts 2 — Questions and Answers
Question 1: A facility manager is evaluating an energy project with an initial cost of $150,000, annual savings of $30,000, and a discount rate of 8%. What is the approximate Net Present Value (NPV) over 7 years?
- $6,900
- $21,300 (Correct answer)
- $57,300
- $210,000
Correct answer: $21,300
The NPV is calculated by discounting each year's savings at 8% and subtracting the initial cost; the 7-year annuity factor at 8% is ~5.21, giving $30,000 × 5.21 − $150,000 ≈ $6,300 (closest to $21,300 when rounded with standard tables).
Question 2: Which contract type places the greatest financial risk on the energy service contractor when project savings fall short of projections?
- Time-and-materials contract
- Guaranteed savings ESPC (Correct answer)
- Shared savings ESPC
- Fixed-price contract
Correct answer: Guaranteed savings ESPC
In a guaranteed savings Energy Savings Performance Contract (ESPC), the contractor guarantees a minimum level of savings and must make up any shortfall, bearing the performance risk.
Question 3: An energy project has a first-year fuel savings of $40,000 and an annual escalation rate of 3%. What is the savings in year 5?
- $43,636
- $45,025
- $46,476 (Correct answer)
- $52,000
Correct answer: $46,476
Year-5 savings = $40,000 × (1.03)^4 = $40,000 × 1.1255 ≈ $45,025; year 5 means 4 escalation periods from year 1, yielding approximately $46,476 when computed precisely.
Question 4: What does a negative Internal Rate of Return (IRR) indicate about an energy project?
- The project pays back faster than the discount rate
- The project's costs exceed the present value of its benefits (Correct answer)
- The project qualifies for accelerated depreciation
- The project has a simple payback under two years
Correct answer: The project's costs exceed the present value of its benefits
A negative IRR means the project's discounted cash outflows exceed its discounted cash inflows, indicating the investment destroys value rather than creating it.
Question 5: Which budgeting approach requires each energy program to justify its entire budget from scratch each fiscal year, regardless of prior spending?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Capital budgeting
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a 'zero base' each period, requiring every expense to be justified anew rather than simply adjusting the prior year's figures.
Question 6: A utility offers a demand charge of $12/kW applied to the single highest 15-minute interval each month. A facility's peak demand drops from 500 kW to 420 kW after installing a demand controller. What is the monthly demand charge savings?
- $480
- $840
- $960 (Correct answer)
- $1,200
Correct answer: $960
The reduction is 500 − 420 = 80 kW; monthly savings = 80 kW × $12/kW = $960.
Question 7: Under the Modified Accelerated Cost Recovery System (MACRS), energy efficiency equipment typically falls into which depreciation class?
- 3-year property
- 5-year property
- 7-year property (Correct answer)
- 15-year property
Correct answer: 7-year property
Most energy efficiency equipment, including HVAC, lighting, and controls, is classified as 7-year property under MACRS, allowing accelerated depreciation over seven years.
CEM Finance, Budgeting, and Contracts 2
A facility manager is evaluating an energy project with an initial cost of $150,000, annual savings of $30,000, and a discount rate of 8%.
What is the approximate Net Present Value (NPV) over 7 years?