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Finance, Budgeting, and Contracts 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 Finance, Budgeting, and Contracts flashcards as text

  1. An energy manager is comparing two projects. Project A has an IRR of 14% and Project B has an IRR of 11%. The company's hurdle rate is 12%. Which project(s) should be approved?

    Answer: Only Project A

    Projects are acceptable when their IRR exceeds the hurdle rate; Project A (14% > 12%) qualifies, but Project B (11% < 12%) does not.

  2. In a shared-savings ESPC arrangement, how are the energy cost savings typically split between the owner and the ESCO?

    Answer: Savings are split by a pre-negotiated percentage throughout the contract term

    In a shared-savings ESPC, the owner and ESCO divide energy cost savings by a pre-agreed percentage (e.g., 60/40) for the duration of the contract.

  3. Which financial metric is most appropriate for ranking multiple independent energy projects when capital is limited?

    Answer: Profitability Index

    The Profitability Index (NPV divided by initial investment) ranks projects by value created per dollar invested, making it ideal for capital rationing decisions.

  4. A utility tariff includes a ratchet clause set at 85% of the previous 11 months' peak demand. If the highest recorded peak was 1,000 kW and the current month's actual peak is 700 kW, what demand is billed?

    Answer: 850 kW

    The ratchet demand = 85% × 1,000 kW = 850 kW, which exceeds the actual 700 kW, so the facility is billed for 850 kW.

  5. Which type of contract clause protects an energy buyer from unexpected fuel price increases by allowing cost adjustments tied to a published index?

    Answer: Escalation clause

    An escalation clause links contract prices to a recognized index (such as the CPI or a fuel price index), automatically adjusting costs when the index changes.

  6. What is the primary purpose of a measurement and verification (M&V) protocol in an energy performance contract?

    Answer: To verify that guaranteed savings have actually been achieved

    M&V protocols provide an objective, agreed-upon methodology to confirm that projected energy savings were actually realized during the contract period.

  7. An energy project costs $200,000 and is expected to save $35,000 per year. Using the simple payback method, approximately how many years will it take to recover the investment?

    Answer: 5.7 years

    Simple payback = Initial cost ÷ Annual savings = $200,000 ÷ $35,000 ≈ 5.7 years.