Certified Energy Auditor Certification Certified Energy Auditor Economic Analysis of Projects 1 — Questions and Answers
Question 1: A building owner is evaluating two energy conservation measures. Measure X has a Net Present Value (NPV) of $14,500 and Measure Y has an NPV of $9,200, both evaluated over the same 10-year period at the same discount rate. Which conclusion is most appropriate?
- Measure Y is preferable because it has a lower initial cost
- Measure X is preferable because it generates more economic value in today's dollars (Correct answer)
- Both measures are equally acceptable if their payback periods are identical
- NPV alone cannot determine which measure is superior without knowing the SIR
Correct answer: Measure X is preferable because it generates more economic value in today's dollars
NPV represents the total present value of net benefits over the project life. A higher NPV means greater economic value in today's dollars, making Measure X the superior choice when all other evaluation parameters are equal.
Question 2: An energy auditor calculates the Life Cycle Cost (LCC) of a chiller replacement at $210,000 (including initial cost, energy, maintenance, and replacement costs over 20 years) versus keeping the existing unit at an LCC of $275,000 over the same period. What does this analysis indicate?
- The existing unit is preferable because it avoids the upfront capital expenditure
- The chiller replacement is economically justified because its LCC is lower (Correct answer)
- The analysis is inconclusive without knowing the simple payback period
- LCC analysis is not applicable to HVAC equipment decisions
Correct answer: The chiller replacement is economically justified because its LCC is lower
Life Cycle Cost analysis accounts for all costs over the equipment's life. Since the replacement LCC ($210,000) is lower than keeping the existing unit ($275,000), the replacement is economically justified despite the upfront capital cost.
Question 3: When applying discounted cash flow analysis to an energy project, what is the primary purpose of the discount rate?
- To account for the inflation rate on energy prices over the project life
- To reflect the time value of money by expressing future cash flows in present-day terms (Correct answer)
- To determine the maximum acceptable simple payback period for a project
- To calculate the annual depreciation of installed energy conservation measures
Correct answer: To reflect the time value of money by expressing future cash flows in present-day terms
The discount rate in discounted cash flow analysis converts future savings and costs into their present value equivalents, reflecting the principle that a dollar today is worth more than a dollar in the future due to the time value of money.
Question 4: A commercial facility is analyzing an energy project with the following cash flows: Year 0 investment of $30,000, and uniform annual savings of $5,500 for 8 years. At a discount rate of 7%, the present value of the savings stream is $32,650. What is the project's NPV?
- -$2,650
- $2,650 (Correct answer)
- $14,000
- $32,650
Correct answer: $2,650
NPV is calculated as the present value of benefits minus the initial investment: $32,650 − $30,000 = $2,650. A positive NPV indicates the project generates more value than the cost of capital, making it economically viable.
Question 5: Under FEMP (Federal Energy Management Program) methodology, which discount rate is typically used when evaluating energy conservation measures in federal facilities?
- The facility's internal rate of return from its most recent fiscal year
- The OMB-prescribed real discount rate published annually in OMB Circular A-94 (Correct answer)
- The prime lending rate set by the Federal Reserve
- A fixed rate of 10% as specified in Executive Order 13123
Correct answer: The OMB-prescribed real discount rate published annually in OMB Circular A-94
FEMP requires use of the real discount rate published annually by the Office of Management and Budget (OMB) in Circular A-94 for evaluating federal energy projects. This rate reflects the federal government's cost of capital in real (inflation-adjusted) terms.
Question 6: An energy auditor is evaluating three mutually exclusive projects and obtains the following SIR values: Project A = 1.8, Project B = 0.9, Project C = 2.4. Budget allows only one project. Which project should be recommended if the goal is to maximize economic return per dollar invested?
- Project A, because it has the highest absolute NPV
- Project B, because it has the lowest upfront cost
- Project C, because it has the highest Savings-to-Investment Ratio (Correct answer)
- Project A, because an SIR above 1.5 is the minimum FEMP threshold
Correct answer: Project C, because it has the highest Savings-to-Investment Ratio
The Savings-to-Investment Ratio measures the return per dollar invested. Among mutually exclusive projects where budget allows only one, the project with the highest SIR (Project C at 2.4) maximizes economic return per dollar invested. Project B's SIR below 1.0 means costs exceed benefits.
