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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. 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?

    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).

  2. Which contract type places the greatest financial risk on the energy service contractor when project savings fall short of projections?

    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.

  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?

    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.

  4. What does a negative Internal Rate of Return (IRR) indicate about an energy project?

    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.

  5. Which budgeting approach requires each energy program to justify its entire budget from scratch each fiscal year, regardless of prior spending?

    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.

  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?

    Answer: $960

    The reduction is 500 − 420 = 80 kW; monthly savings = 80 kW × $12/kW = $960.

  7. Under the Modified Accelerated Cost Recovery System (MACRS), energy efficiency equipment typically falls into which depreciation class?

    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.