BEE Paper-1 — Chapter 7: Financial Management

1. What is the future value of a cash flow at the end of the 6th year, if the Present Value is Rs. 2 Lakhs and the interest rate is 9%?

1. 3,28,540
2. 3,35,420
3. 2,84,980
4. none of the above

2. Return on investment (ROI) is ____.

1. initial investment/annual return
2. annual cost/capital cost
3. annual net cash flow/capital cost
4. none of the above

3. A sensitivity analysis is carried out for an energy saving project to make an assessment of

1. cash flows
2. risks due to assumptions
3. capital investment
4. best financing source

4. A waste heat recovery system costs Rs. 54 lakh and Rs. 2 lakh per year to operate and maintain. If the annual savings is Rs. 20 lakhs, the payback period will be

1. 8 years
2. 2.7 years
3. 3 years
4. 10 years

5. The ratio of annual net cash flow to capital cost is ____

1. net present value
2. internal rate of return
3. return on investment
4. discount factor

6. Which of the following equation is used to calculate the future value of the cash flow?

1. NPV (1 – i)n
2. NPV / (1 – i)n
3. NPV (1 + i)n
4. NPV/ (1 + i)n

7. For a project to be viable, the ROI must always be ___ the interest rate.

1. lower than
2. higher than
3. equal to
4. no relation to

8. Which of the following is not true of IRR?

1. it takes into account time value of money
2. it considers the cash flow streams in its entirety
3. does not distinguish between lending and borrowing
4. none of the above

9. The internal rate of return is the discount rate for which the NPV is ____.

1. Always positive
2. Always negative
3. negative or positive
4. None of the above

10. The present value of equipment is Rs. 10,000 and discount rate is 10%. The future value of the cash flow at the end of 2 years is:

1. Rs. 10000
2. Rs. 12,100
3. Rs. 8100
4. Rs. 8264

11. Which among the following can be best implemented through an ESCO (Energy Service Company) route:

1. coal procurement contract for captive power plant
2. energy efficient design of a municipal lighting system
3. large Waste Heat Recovery System in a large process plant, where external financing is sought
4. energy and mass balance study of a Steel Plant

12. The cost of replacement of an inefficient chiller with an energy efficient chiller was Rs. 10 lakh. The net annual cash flow is Rs. 2.50 lakh. The return on investment is:

1. 18%
2. 20%
3. 15%
4. none of the above

13. The contractor provides the financing and is paid an agreed fraction of actual savings achieved, used to pay down the debt costs of equipment/services. This is known as

1. traditional contract
2. extended technical guarantee/service
3. performance Contract
4. shared savings performance contract

14. In project financing, sensitivity analysis is applied because

1. almost all the cash flows involve uncertainly
2. it evaluates how sensitive the project is to change in the input parameters
3. it assesses the impact of ‘what if one or more factors are different from what is predicted’
4. it is applicable to all the above situations

15. To calculate internal rate of return, the net present value is set to

1. 1
2. 0
3. 10
4. 100

16. The discount rate is used as an input in determining _________.

1. NPV
2. IRR
3. payback period
4. all of the above

17. The cost of an economizer is Rs. 2 lakhs. The simple payback period (SPP) in years considering annual savings of Rs 1,10,000 and annual maintenance cost of Rs 10,000 is ___________.

1. 1.8
2. 2.5
3. 2
4. 0.5

18. Which of the following is true?

1. The internal rate of return is the discount rate for which the NPV is Zero
2. NPV is the internal rate of return for which the discount rate is Zero
3. The discount rate is the internal rate of return for which NPV is positive
4. NPV is the discount rate for which internal rate of return is positive

19. Which of the following statements are true regarding simple payback period?

1. considers impact of cash flow even after payback period
2. takes into account the time value of money
3. considers cash flow throughout the project life cycle
4. determines how quickly invested money is recovered

20. A waste heat recovery system requires Rs. 50 lakhs investment and Rs. 2 lakhs per year to operate and maintain. If the annual savings is Rs. 22 lakhs, the payback period will be

1. 2.28 years
2. 2.5 years
3. 3 years
4. 10 years

21. For investment decision, ROI must always be _____ prevailing interest rate.

1. Lower than
2. Higher than
3. Equal to
4. No relation

22. If asset depreciation is considered, then net operating cash inflow would be

1. lower
2. higher
3. no effect
4. none of the above

23. Which technique takes care of time value of money in evaluation?

1. payback period
2. IRR
3. NPV
4. Both (b) & (c)

24. The retrofitting of a variable speed drive in a plant costs Rs 2 lakh. The annual savings is Rs 0.5 lakh. The maintenance cost is Rs. 5,000/year. The return on investment is

1. 25%
2. 22.5%
3. 24%
4. 27.5%

25. The cost of replacement of inefficient chiller with an energy efficient chiller in a plant was Rs. 10 lakh .The net annual cash flow is Rs 2.50 lakh .The return on investment is:

1. 18%
2. 20%
3. 15 %
4. none of the above

26. The contractor provides the financing and is paid an agreed fraction of actual savings achieved. This payment is used to pay down the debt costs of equipment and/or services. This is known as

1. traditional contract
2. extended technical guarantee/service
3. performance Contract
4. shared savings performance contract

27. Which of the following statements regarding ECBC are correct? i) ECBC defines the norms of energy requirements per cubic metre of area ii) ECBC does not encourage retrofit of Energy conservation measures iii) ECBC prescribes energy efficiency standards for design and construction of commercial and industrial buildings iv) One of the key objectives of ECBC is to minimize life cycle costs (construction and operating energy costs)

1. i
2. ii
3. iii
4. iv

28. What is the future value of Rs.1000/- after 3 years, if the interest rate is 10%

1. Rs. 1331
2. Rs.1610
3. Rs.3221
4. none of the above

29. Any management would like to invest in projects with

1. Low IRR
2. Low ROI
3. Low NPV of future returns
4. none of the above

30. Which of these is not true of payback period

1. Simple to calculate
2. Considers cash flow beyond the payback period
3. Shorter the period the better
4. Does not take into account, time value of money

31. The return on investment (ROI), is expressed as

1. annual cost / capital cost
2. (first cost / first year benefits) x 100
3. NPV / IRR
4. (annual net cash flow x 100) / capital cost

32. _________ considers impact of cash flow even after payback period

1. net present value
2. return on investment
3. sensitivity analysis
4. simple payback period

33. __________ determines the project viability in response to changes in input parameters.

1. Life cycle analysis
2. Financial analysis
3. Sensitivity analysis
4. Payback analysis

34. For a project to be financially attractive, ROI must always be ___ than interest rate.

1. lower
2. higher
3. equal
4. no relation

35. Which of the following macro factors is used in the sensitivity analysis of project finance?

1. Change in tax rates
2. Changes in maintenance cost
3. Changes in debt: equity ratio
4. Change in forms of financing

36. Which of the following statements regarding ECBC are correct? ECBC defines the norms of energy requirements per sq. metre of area taking into account climatic region where building is located ii) ECBC does not encourage retrofit of Energy conservation measures iii) ECBC prescribes energy efficiency standards for design and construction of commercial and industrial buildings iv) One of the key objectives of ECBC is to minimize life cycle costs (construction and operating energy costs)

1. i & ii
2. i & iii
3. ii & iii
4. i & iv

37. Which of the following statements regarding Internal Rate of Return (IRR) is correct?

1. IRR distinguishes between lending and borrowing
2. Internal rate of return is the discount rate at which net present value is equal to zero
3. if the IRR is higher than current interest rate, the investment is not attractive
4. between two alternative projects, the project with lower internal rate of return would be considered more attractive

38. The cost of a new heat exchanger is Rs. 1.0 lakh. The simple payback period in years considering annual savings of Rs 60,000 and annual operating cost of Rs. 10,000 is

1. 0.50
2. 1.66
3. 2.00
4. 6.00

39. What does the concept of time value of money imply

1. present value of money
2. future value of money
3. discounting of cash flows
4. all of the above

40. Return on Investment (ROI) as a fraction means

1. initial investment / annual return
2. annual cost / cost of capital
3. annual net cash flow / capital cost
4. none of the above

41. The net present value (NPV) is

1. equal to the sum of the present values of all cash flows
2. equal to the sum of returns
3. equal to the sum of all cash flows
4. none of the above

42. The Internal Rate of Return (IRR) of an investment is calculated by

1. selecting a discount rate so that NPV = 0
2. equating total discounted costs with total discounted benefits
3. making sure the benefit / cost ratio equals unity
4. all of the above

43. Project A has an IRR of 85% and NPV of Rs 15,000; project B has an IRR of 25% and NPV of Rs 200,000. Which project would you implement first if financing is available and project technical life is the same?

1. B
2. A
3. cannot be decided
4. question does not make sense

44. Which of the following equation can be used to calculate the future value from the present value of cash?

1. NPV = FV x (1 + i)^n
2. FV = NPV x (1 - i)^n
3. NPV = FV / (1 + i)^n
4. none of the above

45. The Net Present Value of a project at a discount rate of 16% with an investment of Rs 50,000 at the beginning of the first year, and savings of Rs 23,000 and Rs 36,000 at the end of the first and second year respectively is

1. 6,581
2. -246
3. 862
4. -3,419

46. A sum of Rs 10,000 is deposited in a bank at the beginning of a year. The bank pays 6% interest annually. How much money is in the bank account at the end of the fifth year, if no money is withdrawn?

1. 13,382
2. 12,625
3. 13,000
4. 10,937

47. The broad indicator of the annual return expected from initial capital investment is

1. NPV
2. IRR
3. ROI
4. Discount factor

48. Which among the following is not a typical performance contract

1. Shared savings
2. Guaranteed savings
3. Fixed fee
4. Hire purchase

49. If the NPV of an investment is Rs.10000 when calculated at a discount rate of 10%. What is the future value of the investment for a period of 2 years.

1. 12100
2. 12000
3. 12110
4. 12101

50. ROI should be always ____ than borrowing interest rate for economic feasibility of any project.

1. Lower
2. Equal
3. No relation
4. Higher

51. Which of the following is true with respect to IRR?

1. If IRR is high than the current interest rate, the investment is not attractive
2. If between two projects the project with low IRR would be more attractive
3. IRR is the discount rate at which the NPV is zero
4. All of the above

52. Select the wrong statement for financial analysis ____.

1. Simple Payback is a measure of how long it will be before the investment makes money
2. Return on Investment (ROI) and Internal Rate of Return (IRR) enable comparison with other investment options
3. Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time
4. Depreciation and payback are two deciding factors about the time value of money.

53. The retrofitting of a variable speed drive in a plant costs Rs 2 lakh. The annual savings is Rs 0.4 lakh. The maintenance cost is Rs. 0.05 lakh/year. The return on investment is ____.

1. 25%
2. 22.5%
3. 24%
4. 17.5%

54. Find the future value of Rs. 1,000 at an interest rate of 10% in 10 years' time.

1. Rs. 2,594
2. Rs. 386
3. Rs. 349
4. Rs. 10,000

55. "Toe" stands for ____.

1. Total oil equivalent
2. Tons of effluent
3. Tons of energy equivalent
4. Tons of oil equivalent

56. Sensitivity analysis is an assessment of ____.

1. Profits
2. Losses
3. Risks
4. All of the above

57. Which of the following is NOT a conventional financing option?

1. Debt financing
2. Performance contracting
3. Retained earnings
4. Stock buyback

58. Two projects: X (IRR=40%, NPV= Rs 50,000/-) and Y (IRR=30%, NPV= Rs 1,20,000/-) having same life, no finance limit. Choose the best project.

1. X
2. Y
3. Cannot decide
4. Question invalid

59. Term for asset value decrease over time:

1. Discounting
2. Inflation
3. Depreciation
4. Compounding

60. Life-cycle costing is better than simple purchase cost because it:

1. Includes operation, maintenance and energy costs over life
2. Ignores maintenance costs
3. Forces single-supplier bidding
4. Cuts down procurement cycle time

61. In a 'Guaranteed Savings' ESCO project, the ESCO company would not be involved in:

1. Project design
2. Project finance
3. Project implementation
4. Verifying energy savings

62. ROI for an investment of Rs 1,00,000 with an annual return of Rs 20,000 per year is_______

1. 1%
2. 10%
3. 20%
4. 200%

63. What is the payback period in energy management?

1. Time taken to identify savings
2. Time taken to report savings
3. Time taken to recover the investment through savings
4. All of the above

64. Which of the following is a method for financing energy efficiency projects?

1. Loans
2. Leasing
3. Performance contracting
4. All of the above

65. What is the primary financial metric used to evaluate energy projects?

1. Gross margin
2. Net present value (NPV)
3. Revenue
4. Operating income

66. The internal rate of return is discount rate for which NPV is

1. Positive
2. Zero
3. Negative
4. All of the above

67. Which techniques takes care of time value of money in evaluation?

1. Payback Period
2. IRR
3. NPV
4. Both B and C

68. If asset depreciation is considered, then the net operating cash inflow will be

1. Lower
2. Higher
3. No effect
4. None of the above

69. Which two appraisal techniques account for the time value of money?

1. Simple payback and ROI
2. NPV and IRR
3. ROI and NPV
4. Simple payback and IRR

70. A cogeneration project costs Rs.90 lakh, saves Rs.23 lakh/yr in energy, and has an annual O&M cost of Rs.5 lakh. Its simple payback period is:

1. 3.9 years
2. 5 years
3. 4 years
4. 18 years

71. An investment of Rs.1,00,000 yields an annual after-tax cash flow of Rs.25,000. The Return on Investment (ROI) is:

1. 4%
2. 25%
3. 40%
4. 2.5%

72. Rs.10,000 is invested at 6% compound interest for 5 years. The future value is approximately:

1. Rs.13,000
2. Rs.13,382
3. Rs.12,625
4. Rs.16,000

73. The present value of Rs.1,00,000 to be received in 3 years, at a discount rate of 10% (PV factor = 0.751), is:

1. Rs.75,100
2. Rs.1,33,100
3. Rs.90,900
4. Rs.70,000

74. The Internal Rate of Return (IRR) of a project is defined as the discount rate at which:

1. NPV is maximum
2. NPV equals zero
3. Payback equals 1 year
4. ROI equals 100%

75. A project needs Rs.50,000 now and returns Rs.23,000 in year 1 and Rs.36,000 in year 2. At a 16% discount rate (factors 0.862 and 0.743), the NPV is approximately:

1. +Rs.9,000
2. −Rs.3,426
3. +Rs.3,426
4. −Rs.9,000

76. Trial NPVs of a project are +Rs.495 at 12% and −Rs.65 at 13%. Using linear interpolation, the IRR is approximately:

1. 12.5%
2. 12.88%
3. 13.12%
4. 12.13%

77. Which of the following is NOT a type of energy performance contract?

1. Fixed fee
2. Shared savings
3. Guaranteed savings
4. Hire purchase

78. Straight-line depreciation of an asset is calculated as:

1. (Cost − Salvage value) / Useful life
2. Cost / Salvage value
3. Cost × Useful life
4. (Cost + Salvage value) / Useful life

79. Project A has IRR 85% and NPV Rs.15,000; Project B has IRR 25% and NPV Rs.2,00,000. With equal life and financing available, which should be implemented first?

1. Project A, because its IRR is higher
2. Project B, because its NPV is higher
3. Neither, because IRR and NPV disagree
4. Both must have equal priority

80. Under a 'true lease', which statement is correct?

1. The lessee owns the asset and claims depreciation
2. Lease payments are tax-deductible but no depreciation benefit is available
3. Lease payments are not tax-deductible
4. The lessee always owns the asset at the end of the lease

81. Consider two competitive projects entailing investment of Rs.85,000/-. Project A returns Rs.50,000 at the end of each year, but Project B returns Rs.115,000 at the end of year 2. Which project is superior?

1. Project A since it starts earning by end of first year itself and recovers cost before end of two years
2. Project B since it offers higher return in two years
3. both projects are equal in rank
4. insufficient information

82. The annual electricity bill for a plant is Rs 110 lakhs and accounts for 38% of the total energy bill. Furthermore the total energy bill increases by 5% each year. The plant's annual energy bill at the end of the third year will be about ________

1. Rs 335 lakhs
2. Rs 268 lakhs
3. Rs 386 lakhs
4. Rs 418 lakhs

83. The present value of Rs. 1,000 in 10 years' time at an interest rate of 10% is

1. Rs. 2,594
2. Rs. 386
3. Rs. 349
4. Rs. 10,000

84. The cost of replacement of inefficient compressor with an energy efficient compressor in a plant was Rs 50 lakhs. The net annual cash flow is Rs 12.5 lakhs. The return on investment is

1. 15%
2. 20%
3. 25%
4. 19.35%

85. Costs associated with the design, planning, installation and commissioning of a project are

1. variable costs
2. capital costs
3. salvage value
4. none of the above

86. A waste heat recovery system costs Rs. 54 lakhs and Rs. 2 lakhs per year to operate and maintain. If the annual savings is Rs. 20 lakhs, the payback period will be

1. 8 years
2. 2.7 years
3. 3 years
4. 10 years

87. The internal rate of return is the discount rate for which the NPV is

1. positive
2. zero
3. negative
4. less than 1

88. The cost of replacement of inefficient chiller with an energy efficient chiller in a plant was Rs. 10 lakh .The net annual cash flow is Rs 2.50 lakh .The return on investment is:

1. 18%
2. 20%
3. 15%
4. none of the above

89. In project financing,sensitivity analysis is applied because

1. almost all the cash flow methods involve uncertainty
2. of the need to assess how sensitive the project to changes in input parameters
3. what if one or more factors are different from what is predicted
4. all the above situation

90. The cost of retrofitting a humidification system with an energy efficient one costs Rs. 20 lakhs. The net annual cash flow is Rs. 5 lakhs. The return on investment is ________.

1. 18%
2. 25%
3. 15%
4. 33.33%

91. The discount rate is required to be known for determining _________.

1. NPV
2. IRR
3. payback period
4. all of the above

92. Return on investment (ROI) is

1. initial investment/annual return
2. annual cost/capital cost
3. annual net cash flow/capital cost
4. none of the above

93. The internal rate of return is the discount rate for which the NPV is

1. Always positive
2. Always negative
3. negative or positive
4. None of the above

94. Sensitivity analysis is an assessment of

1. Profits
2. Losses
3. Risks
4. All of the above

95. The retrofitting of a variable speed drive in a plant costs Rs 2 lakh. The annual savings is Rs 0.4 lakh. The maintenance cost is Rs. 0.05 lakh/year. The return on investment is

1. 25%
2. 22.5%
3. 24%
4. 17.5%

96. Which of the following statements are true regarding simple payback period?

1. Considers impact of cash flow even after payback period
2. Takes into account the time value of money
3. Considers cash flow throughout the project life cycle
4. None of the above

97. If the NPV of an investment is Rs. 10000 when calculated at a discount rate of 10%, what is the future value of the investment for a period of 2 years?

1. 12100
2. 12000
3. 12110
4. 12101

98. Select the wrong statement for financial analysis

1. Simple Payback is a measure of how long it will be before the investment makes money
2. Return on Investment (ROI) and Internal Rate of Return (IRR) enable comparison with other investment options
3. Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time
4. Depreciation and payback are two deciding factors about the time value of money.

99. Which techniques takes care of time value of money in evaluation

1. Payback Period
2. IRR
3. NPV
4. Both B and C

100. Which of the following macro factors is used in the sensitivity analysis of project finance

1. Change in Tax rate
2. Change in O & M Cost
3. Change in Debt : equity Ratio
4. Change in forms of Financing

101. Two projects: X (IRR = 40%, NPV = Rs 50,000) and Y (IRR = 30%, NPV = Rs 1,20,000) having same life, no finance limit. Choose the best project.

1. X
2. Y
3. Cannot decide
4. Question invalid

102. ROI for an investment of Rs 1,00,000 with an annual return of Rs 20,000 per year is _______

1. 1%
2. 10%
3. 20%
4. 200%

1. What are the limitations of the (simple) payback period?

2. What are the limitations of the ROI method?

3. Compare the NPV and IRR methods of financial analysis.

4. Explain briefly the operation of an ESCO.

5. 100 fused 60 W incandescent lamps are replaced by 100 nos. 12 W CFLs (instead of new 60 W lamps), for 4000 h/yr. Find (i) the annual reduction in electricity cost if energy charge is Rs.4/kWh and demand charge is Rs.250/kVA/month, and (ii) the simple payback if an ILB costs Rs.10 and a CFL costs Rs.100 (lives 1000 h and 4000 h).

6. A firm invests Rs.10 lakh at the start of year 1 in an EE project and expects an IRR of at least 26% on a constant annual net cash flow of Rs.2 lakh over 10 years. Will the project meet the firm's expectation?

7. An energy retrofit costs Rs.1,00,000 and yields 6000 kWh/yr at Rs.3/kWh plus Rs.3800/yr demand savings plus Rs.2000/yr maintenance savings, for a 10-year life with no rate change. Calculate the NPV at a 12% discount rate.

8. Explain why a project with a high IRR is not necessarily more attractive than a project with lower IRR.

9. An industry invests Rs.5,00,000 in an energy-saving project with cash flows Year 1 Rs.2,00,000, Year 2 Rs.3,00,000, Year 3 Rs.2,00,000. Required return 10%. Evaluate the NPV and comment on feasibility.

10. An ESCO invests in a waste-heat recovery project expected to yield Rs.10,00,000/yr for 7 years. If the ESCO expects 30% IRR, calculate the maximum investment that can be made.

11. A VFD for a fan needs Rs.3 lakh investment; cash flows at end of years 1, 2, 3 are Rs.1.2 lakh, Rs.1.5 lakh, Rs.1.5 lakh. Calculate NPV at 10% and state whether the project is feasible.

12. Calculate NPV over 4 years for a project with Rs.70,000 invested at the start of year 1 and another Rs.70,000 at the start of year 2, with fuel-cost savings of Rs.65,000 in year 2 and Rs.60,000 each in years 3 and 4. Discount rate 12%.

13. An energy-efficient air compressor costs Rs.6,00,000, saves Rs.1,80,000/yr for 3 years, with annual maintenance of Rs.10,000 from year 2 onward, salvage Rs.50,000 at end of year 3, discount rate 10%. Find (a) net annual cash flow from year 2, (b) NPV, (c) economic acceptability.

14. Calculate the investment of a project having IRR 16% with annual savings of Rs.15,000, Rs.18,000 and Rs.20,000 at the end of years 1, 2 and 3 respectively.

15. An energy-saving project costs Rs.30,000 and yields net savings of Rs.6,000/yr for 10 years. At an 8% discount rate, calculate the NPV and state whether to accept. (8% PV factors yrs 1–10: 0.926, 0.857, 0.794, 0.735, 0.681, 0.630, 0.583, 0.540, 0.500, 0.463.)

16. A project needs Rs.20,000 and gives cash flows of Rs.6,000, 5,500, 5,000, 4,500, 4,000, 4,000 over years 1–6. Trial NPVs are +Rs.495 at 12% and −Rs.65 at 13%. Estimate the IRR and state whether it is acceptable if the cost of capital is 8%.

17. Define the simple payback period and state its formula.

18. A cogeneration system reduces a company's annual energy bill by Rs.23 lakh. Capital cost is Rs.90 lakh and annual maintenance/operating cost is Rs.5 lakh. What is the payback period?

19. Define Return on Investment (ROI), give its formula, and state its relationship to payback period.

20. An outlay of Rs.1,00,000 for equipment provides an after-tax cash flow of Rs.25,000/yr over six years without significant fluctuation. What is the ROI?

21. State the advantages of the simple payback period as an appraisal method.

22. What is the time value of money? Differentiate between compounding and discounting.

23. Write the equations relating future value and present value of a cash flow, defining each variable.

24. Define Net Present Value (NPV) and state its decision rule and formula.

25. State the advantages of the Net Present Value (NPV) method.

26. Define the Internal Rate of Return (IRR) and state how it is interpreted.

27. Write the interpolation formula used to estimate the IRR.

28. State the advantages and the limitation of the IRR method.

29. List the basic criteria used for financial investment appraisal and what each measures.

30. List the four elements considered in judging the attractiveness of any investment (cash-flow elements).

31. What is salvage (terminal) value in investment analysis?

32. What is a cash-flow diagram and what are the conventions/rules for drawing one?

33. What is sensitivity analysis and why is it carried out?

34. In financial management, what are micro and macro factors? List three of each that influence sensitivity analysis.

35. List the conventional financing options for capital investment given in the guidebook.

36. Differentiate debt financing from equity financing in terms of ownership, cost and tax treatment.

37. What are retained earnings as a financing option, and what cost of capital applies to them?

38. Differentiate a capital lease from a true lease, and state why a true lease offers no depreciation benefit.

39. Write short notes on debt financing.

40. What is an ESCO and what is energy performance contracting?

41. List and explain the three common types of performance contract offered by ESCOs.

42. Which financing arrangement is NOT a type of performance contract, and what are the actual performance-contract types?

43. What are the drawbacks (cons) of performance contracting with an ESCO?

44. How is the risk assigned to an ESCO related to the savings it shares, with an example?

45. State the benefits to industry of using an ESCO / performance contracting.

46. What is depreciation, and what three conditions must an asset meet to be depreciable?

47. Write the straight-line depreciation formula and explain the depreciation tax shield.

48. What is an Investment Grade Audit (IGA) and its role in ESCO contracting?

49. State the formula used to calculate energy saved in measurement & verification (M&V) of an ESCO project, defining each term.

50. Why is financial appraisal of energy conservation projects necessary?

51. Besides energy savings, in what terms should the benefits of energy management projects be projected to senior management?

52. Using two projects A and B (both costing Rs.1,00,000), explain the key drawback of the payback period.

53. Expand the following Chapter-7 acronyms: NPV, IRR, ROI, ESCO, IGA, EPC, M&V (PMV).

54. What is meant by 'discounting' or the 'present value concept', and why is it needed?

55. How should the discount rate for an NPV calculation be chosen?

56. Calculate the net present value over a period of 3 years for a project with one investment of Rs 50,000 at the beginning of the first year and a second investment of Rs 30,000 at the beginning of the second year and fuel cost savings of Rs 40,000 each in the second and third year. The discount rate is 16%.

57. Briefly compare NPV and IRR method of financial analysis.

58. Calculate the net present value over a period of 3 years for a project with one investment of Rs 50,000 at the beginning of the first year and a second investment of Rs 30,000 at the beginning of the second year and fuel cost savings of Rs 40,000 each in the second and third year. The discount rate is 14%.

59. An industrial plant is consuming 400 kW of power with a maximum demand of 520 kVA. The demand charge is Rs. 150/- per kVA. Determine the savings possible by improving power factor to 0.95 and payback period if investment on capacitor bank is Rs 1,50,000/-.

60. An industrial plant is consuming 400 kW of power with a maximum demand of 520 kVA. The demand charge is Rs. 150/- per kVA. Determine the savings possible by improving power factor to 0.95 and payback period if investment on capacitor bank is Rs 1,00,000/-.

61. Calculate the net present value over a period of 3 years for a project with the following data. The discount rate is 12%. Year Investment (Rs) Savings (Rs) 0 75,000 1 25,000 2 75,000 3 50,000 75,000 4 35,000

62. An ESCO company is required to invest in a waste heat recovery project, which is expected to yield an annual saving of Rs.10,00,000 and the life of the equipment is 7 years. If the ESCO expects 30% IRR on this project, calculate the investment required to be made.

63. An industry intends to invest Rs. 5,00,000 in a new energy saving project. The cash flows expected are: Year 1 : Rs.2,00,000; Year 2 : Rs.3,00,000; Year 3 : Rs.2,00,000. The expected return is 10%. Evaluate the Net Present Value and comment on the feasibility of the project?

64. a) Calculate the Net Present Value of a project at a discount rate of 16% with an investment of Rs. 50,000 at the beginning of the first year and savings of Rs. 15,000, Rs. 18,000 and Rs. 20,000 respectively at the end of the first, second and third year. (3 Marks) b) State whether the project is viable or not? (2 Marks)

65. a) Explain energy performance contracting and their types? (3 Marks) b) Explain the role of ESCOs in energy performance contracting? (2 Marks)

66. Calculate the Net Present Value over a period of 4 years for a project with an investment of Rs 70,000 at the beginning of the first year and another investment of Rs 70,000 at the beginning of the second year and fuel cost saving of Rs 65,000 in second year and Rs. 60,000 each in third and fourth year. The discount rate is 12%. (5 Marks)

67. A VFD is to be installed for a fan. The initial investment is 3 lakh rupees and cashflow at the end of 1st, 2nd and 3rd year are 1.2 lakh, 1.5 lakh and 1.5 lakh rupees respectively. Calculate NPV at 10% discount rate and check whether this project is feasible or not. (5 Marks)

68. Calculate the investment of the project having IRR of 16% and having respective annual savings of Rs 15,000, Rs. 18,000 and Rs. 20,000 at the end of the first, second and third year. (5 Marks)

69. An energy audit conducted in a rubber processing unit identifies the following: A centrifugal pump (motor rating 30 kW) runs continuously for 16 hours/day, 300 days/year. Measured motor loading = 65%, Motor efficiency = 88%, with no flow control. A VFD retrofit is proposed, which is expected to reduce energy consumption by 10% due to optimized flow control. Power cost = Rs. 7.0/kWh. VFD installation cost = Rs. 1,50,000. a) Calculate the current annual energy consumption of the motor. (2 Marks) b) Estimate the expected annual energy savings from the VFD. (1 Mark) c) Calculate the annual cost saving in Rs. (1 Mark) d) Determine the simple payback period for the investment. (1 Mark)

70. A medium-sized factory installs an energy-efficient air compressor system costing Rs. 6,00,000. An audit estimates that it will save Rs. 1,80,000 per year in energy bills for the next 3 years. Annual maintenance is expected to cost Rs. 10,000 starting from the second year onward. Assume: Discount rate (cost of capital) is 10% and salvage value at the end of the third year is Rs. 50,000. a) Calculate the net annual cash flow from Year 2 onward (2 Marks) b) Compute the Net Present Value (NPV) of the investment (2 Marks) c) Based on NPV, assess whether the project is economically acceptable (1 Mark)

1. A cogeneration system installation is expected to reduce a company's annual energy bill by Rs. 23 lakhs. If the capital cost of the new cogeneration installation is Rs. 90 lakhs and the annual maintenance and operating (O&M) costs are Rs. 5 lakhs, what will be the expected simple payback period for the project? State the formula, the advantages and the limitations of the simple payback method.

2. Two projects A and B each require an investment of Rs. 1,00,000. Their annual cash inflows are: Project A - Yr1 50,000, Yr2 30,000, Yr3 20,000, Yr4 10,000, Yr5 10,000. Project B - Yr1 20,000, Yr2 20,000, Yr3 20,000, Yr4 40,000, Yr5 50,000, Yr6 60,000. Using the payback criterion, which project is selected, and explain why this exposes the main drawback of the simple payback method.

3. An outlay of Rs. 1,00,000 for equipment is expected to provide an after-tax cash flow of Rs. 25,000 per year over a period of six years without significant annual fluctuation. What is the Return on Investment (ROI)? Define ROI, state its relation to payback, and give its advantages and limitations.

4. Using the Net Present Value technique, evaluate the financial merits of the two proposed projects and state which is preferable. Discount rate = 8% for each; both have capital cost Rs. 30,000 and a 10-year life. Net annual savings (Rs.): Project 1 = 6000 every year (Yr1-10). Project 2 = Yr1 6600, Yr2 6600, Yr3 6300, Yr4 6300, Yr5 6000, Yr6 6000, Yr7 5700, Yr8 5700, Yr9 5400, Yr10 5400.

5. A proposed project requires an initial capital investment of Rs. 20,000. Cash flows: Yr1 6000, Yr2 5500, Yr3 5000, Yr4 4500, Yr5 4000, Yr6 4000. The cost of capital is 8%. Determine the Internal Rate of Return (IRR) by the interpolation method, and state whether the project is sound.

6. An oil-fired reheating furnace heats steel billets from 40 C to 1220 C at a furnace efficiency of 28%. It operates 4700 hours/annum. GCV of furnace oil = 10,000 kcal/kg, density 0.94 kg/litre, cost Rs.45/litre. Specific heat of billets = 0.12 kcal/kg C. (a) Energy needed to heat 12 tons of billets/hr. (b) Litres of furnace oil per ton of billet. (c) If efficiency improves 28% -> 30% by ceramic-fibre insulation, the hourly oil cost saving. (d) Simple payback if investment is Rs.20 lakhs. (e) How large an investment is justified for the efficiency improvement at an IRR of 16% per year over 6 years?

7. A company invests Rs. 10 lakhs and completes an energy efficiency project at the beginning of year 1. The firm is investing its own money and expects an IRR of at least 26% on a constant positive annual net cash flow of Rs. 2 lakhs over 10 years. (1) Will the project meet the firm's expectations? (2) What is the IRR of this measure?

8. An energy-saving retrofit costs Rs. 1,00,000 and yields: energy & demand savings of 6000 kWh/year plus Rs. 3800/year in demand charges, and maintenance cost savings of Rs. 2000/year. Energy savings are valued at Rs. 3.00/kWh with no change in energy rates, and the project life is 10 years. Calculate the NPV against a 12% discount rate and give the decision.

9. 100 fused 60 W incandescent lamps (ILB) are replaced by 100 nos. of 12 W CFL (instead of new ILBs). For 4000 hours of operation per year, calculate: (i) the annual reduction in electricity cost if the energy charge is Rs.4/kWh and the demand charge is Rs.250/kVA/month; (ii) the simple payback period, given ILB costs Rs.10 (life 1000 h) and CFL costs Rs.100 (life 4000 h).

10. Explain the operation of an Energy Service Company (ESCO) and energy performance contracting. Describe the three common types of performance contract, the services an ESCO offers, and the benefits and drawbacks of the ESCO route.

11. What is sensitivity and risk analysis in the appraisal of energy-conservation projects? Why is it carried out, and list the micro and macro factors that are considered.

12. Compare the Net Present Value (NPV) and Internal Rate of Return (IRR) methods of investment appraisal, and state the limitations of the simple payback period method and of the ROI method.

13. Describe the conventional financing options available for capital investment in energy-efficiency projects, bringing out the ownership and tax implications of each.

14. What is depreciation? State the conditions for an asset to be depreciable, explain the straight-line method, and describe how depreciation acts as a 'tax shield' in the cash-flow analysis of an energy project.

15. A company invests Rs. 12 lakhs and completes an energy-efficiency project at the beginning of year 1, expecting an IRR of at least 8% on the investment. The project savings are: end of Year 1 = Rs.1.20 lakh, Year 2 = Rs.3 lakh, Year 3 = Rs.4 lakh, Year 4 = Rs.6 lakh, Year 5 = Rs.9 lakh. Will the project meet the firm's expectations? Justify using NPV at the firm's required rate.

16. A company will invest in only ONE of two energy-conservation projects and requires a minimum return of 18%. Project A: investment Rs.17,50,000; net annual inflows Yr1-4 = Rs.4,00,000 each, Yr5 = Rs.5,00,000 (6,00,000 saving less 1,00,000 expense), Yr6 = Rs.6,00,000, Yr7 = Rs.6,00,000, Yr8 = Rs.3,80,300. Project B: investment Rs.12,00,000; net annual inflows Yr1 4,50,000, Yr2 4,00,000, Yr3 3,50,000, Yr4 3,00,000, Yr5 2,50,000, Yr6 2,00,000, Yr7 1,16,650. Using NPV, justify which project to choose.

17. Evaluate a multi-phase project over 5 years: initial investment Rs.20 lakhs; an additional investment of Rs.5 lakhs in Year 3; salvage value Rs.3 lakhs at end of Year 5. Yearly savings (Rs. lakhs): Y1 6, Y2 7, Y3 4, Y4 9, Y5 12. Calculate the Internal Rate of Return (IRR) by interpolation.

18. An industry is exploring two options for its energy-efficiency strategy; only one will be chosen. Discount rate 10%, project life 5 years. Project A: capital Rs.80,000, annual saving Rs.25,000/yr. Project B: capital Rs.1,00,000, annual saving Rs.35,000/yr. Using NPV, find the better option.

19. A paper mill has two investment options for energy saving projects: Option A: Investment envisaged Rs.40 lakhs, annual return is Rs.8 lakhs, life of the project is 10 years, discount rate 10%. Option B: Investment envisaged Rs.24 lakhs, annual return Rs.5 lakhs, life of the project is 8 years, discount rate is 10%. Calculate IRR of both the options and suggest which option the paper mill should select considering the risk is same for both the options.

20. A paper mill has two investment options for energy saving projects: Option A: Investment envisaged Rs.40 lakhs, annual return is Rs.5 lakhs, life of the project is 10 years, discount rate 10%. Option B: Investment envisaged Rs.24 lakhs, annual return Rs.8 lakhs, life of the project is 8 years, discount rate is 10%. Calculate IRR of both the options and suggest which option the paper mill should select considering the risk is same for both the options.

21. It is proposed to install a heat recovery device in a process industry. The capital cost of installing the device is Rs.2,00,000 and after 5 years its salvage value is envisaged at Rs.15,000. The savings accrued by the heat recovery device are as shown below. Determine the net present value after 5 years for a discount rate of 8%. Year / Savings (Rs.): 1, 70,000; 2, 60,000; 3, 60,000; 4, 50,000; 5, 50,000.

22. It is proposed to install a heat recovery device in a process industry. The capital cost of installing the device is Rs.2,00,000 and after 5 years its salvage value is envisaged at Rs.25,000. The savings accrued by the heat recovery device are as shown below. Determine the net present value after 5 years for a discount rate of 8%. Year / Savings (Rs.): 1, 70,000; 2, 60,000; 3, 60,000; 4, 50,000; 5, 50,000.

23. A company has to choose between two projects whose cash flows are as indicated below; Project 1: i. Investment – Rs. 15 Lakhs ii. Annual cost savings – Rs. 4 lakhs. iii. Bi-annual maintenance cost – Rs. 50,000/- iv. Reconditioning and overhaul during 5th year: 6 lakhs v. Life of the project – 8 years vi. Salvage value – Rs. 5 lakhs Project 2: vii. Investment – Rs. 14 Lakhs viii. Annual cost savings – Rs. 3.5 lakhs. ix. Annual Maintenance cost – Rs. 20,000/- x. Reconditioning and overhaul during 4th year: 5 lakhs xi. Life of the project – 8 years xii. Salvage Value- 2 lakhs Which project should the company choose? The annual discount rate is 12%.

24. A company has to choose between two projects whose cash flows are as indicated below; Project 1: i. Investment – Rs. 15 Lakhs ii. Annual cost savings – Rs. 4 lakhs. iii. Bi-annual maintenance cost – Rs. 50,000/- iv. Reconditioning and overhaul during 5th year: 6 lakhs v. Life of the project – 8 years vi. Salvage value – Rs. 2 lakhs Project 2: vii. Investment – Rs. 14 Lakhs viii. Annual cost savings – Rs. 3.5 lakhs. ix. Annual Maintenance cost – Rs. 20,000/- x. Reconditioning and overhaul during 4th year: 5 lakhs xi. Life of the project – 8 years xii. Salvage Value- 5 lakhs Which project should the company choose? The annual discount rate is 12%.

25. a) Explain briefly three types of Performance Contracting? (6 Marks) b) What are the drawbacks of ESCO? (4 Marks)

26. In the washing process of an automobile plant, electricity is being used to heat 5000 litres/hr of water by 8 °C. The industry is planning to convert from Electrical heating to LPG heating. Other Parameters: Annual operating hours = 6000 hours; Efficiency of indirect heating with LPG = 85%; Efficiency of electrical heating = 95%; Calorific value of LPG = 12,000 kcal/kg; Landed cost of LPG = Rs.60/kg; Cost of electricity = Rs.8/kWh. a) If electrical heating is replaced with LPG heating, with an investment is Rs.15 lakhs, compute the simple payback period. (6 Marks) b) Also, calculate the CO2 emissions in both the cases considering the emission factors for LPG as 3 tons of CO2/Ton of LPG and Electricity as 0.81 tons of CO2/MWh. (4 Marks)

27. A company has got the following two energy saving project investment options: Option A: Investment envisaged is Rs. 40 lakhs with an annual return of Rs. 12 lakhs; life of the project is 5 years. Calculate IRR. Option B: A project having IRR of 12%. Which option should the company select?

28. A company invests Rs. 12 lakhs and completes an energy efficiency project at the beginning of year 1. The firm is investing its own reserve money and expects an internal rate of return (IRR) of at least 12% on constant positive annual net cash flow of Rs. 3 lakhs, over a period of 5 years, starting with year 1. a) Will the project meet the firm's expectations? (3 Marks) b) What is the IRR of this measure? Use the interpolation formula for obtaining the nearest IRR value: IRR = (lower discount rate %) + [(NPV at lower discount rate) x (higher discount rate % - lower discount rate %)] / (NPV at lower discount rate - NPV at higher discount rate). (7 Marks)

29. A proposed project requires an initial capital investment of Rs. 100 Lakhs. The cash flows generated by the project are: Year 0 = -100, Year 1 = 30, Year 2 = 30, Year 3 = 40, Year 4 = 45 (Rs. in Lakhs). (a) If the cost of fund is available at 11% for the project, calculate internal rate of return (IRR) for the given project. (6 Marks) (b) What are the limitations of Return on Investment (ROI) technique? (2 Marks) (c) What are the advantages of Simple Payback period technique? (2 Marks)

30. You are evaluating a multi-phase investment project with the following cash flows over a 5-year period. The project includes an initial investment of Rs. 20 Lakhs, an additional investment of Rs. 5 Lakhs in Year 3, and a salvage value of Rs. 3 Lakhs at the end of Year 5. The yearly savings (Rs. Lakhs) are: Year 1 = 6, Year 2 = 7, Year 3 = 4, Year 4 = 9, Year 5 = 12. Calculate the Internal Rate of Return (IRR) for the project. (10 Marks)

31. An industry is exploring two project development options as part of its energy efficiency strategy. Using the NPV concept, find out the better option. Consider 10% as the discount rate and 5 years as the project life. Project A: capital cost 80,000, net annual savings Rs. 25,000 in each of years 1 to 5. Project B: capital cost 100,000, net annual savings Rs. 35,000 in each of years 1 to 5. (10 Marks)