Economic Analysis of Energy Projects Questions and Answers

Answer: C

Correct answer: the company's hurdle rate

The internal rate of return is the discount rate at which the net present value is zero, so a project earning more than the rate the company requires is worth doing. The hurdle rate reflects the cost of capital and the risk of the project, and comparing against inflation or depreciation instead answers a different question.

Answer: D

A ratio above one is the same test as a positive net present value, and it is useful for ranking when the capital available is limited. The second option is the reciprocal of simple payback rather than a discounted measure.

Answer: A

Because each year's saving is worth less than the last, the discounted payback is always longer than the simple one, and a measure with a marginal simple payback may never pay back at all on this basis. It is a useful middle ground between the two extremes.

Answer: B

Correct answer: total cost of owning and running them over their lives

Life cycle costing adds the capital, the running costs, the maintenance and the disposal over the whole life, discounted to a common basis. It exists because the cheapest option to buy is frequently the dearest to own - which comparison on purchase price alone conceals.

Answer: C

It is the reciprocal of the annuity factor and is what a loan repayment calculation uses. Multiplying the capital cost by it and adding the annual running cost gives the equivalent annual cost, which is the cleanest way to compare options of unequal life.

Answer: D

A ten-year option and a twenty-five-year option cannot be compared on a present value taken over different horizons, whereas annualising both puts them on one footing. The alternative is to compare present values over a common multiple of the two lives.

Answer: A

A measure that saves energy but demands frequent attention may cost more in total than one that saves less and is left alone, and only the whole-life view shows it. Where the two options have identical maintenance it drops out of the comparison.

Answer: B

Correct answer: excludes inflation

A real rate is a nominal rate with inflation stripped out, so it is the lower of the two. The rule that follows is one of consistency: real cash flows must be discounted at a real rate and inflated ones at a nominal rate, and mixing the two overstates or understates the result systematically.

Answer: C

The saving is a quantity of energy, and if its price rises the money saved rises with it, which makes many measures look better in prospect than a flat-price appraisal suggests. Assuming a particular escalation is itself a risk that a sensitivity analysis should test.

Answer: D

Writing the asset down faster defers tax, and money deferred is money gained under discounting. It changes the cash flows without changing the engineering, which is why the finance department must be consulted on any substantial measure.