Finance and Business: Capital Versus Operating, NPV, and Budget Variances
The Finance and Business domain tests whether you can justify facility decisions in financial terms and manage budgets the way the CFO reads them.
Core rules
- Operating budgets are recurring, within the fiscal year, and expensed. Capital budgets cover assets above the capitalization threshold and are depreciated over useful life.
- Life-cycle cost (TCO) sums acquisition, energy, maintenance, and disposal costs over the asset life, discounted to present value.
- NPV discounts future cash flows at the hurdle rate; positive NPV creates value. IRR is the rate where NPV equals zero, compared with the hurdle rate. Payback is quick but ignores time value and everything after the payback point.
- Variance analysis compares actual to budget and explains drivers, not just totals.
- Chargeback and cost allocation determine how FM costs reach business units and therefore how those units behave.
Worked example
A chiller replacement costs $200,000 and saves $53,000 a year ($45,000 energy, $8,000 maintenance) for 10 years at an 8% discount rate. The 10-year annuity factor at 8% is 6.710, so PV of savings = $53,000 × 6.710 = $355,630. NPV = $355,630 − $200,000 = $155,630, so the project is worth doing. Simple payback is $200,000 ÷ $53,000 = 3.8 years, useful for cash-flow timing but not for judging value.
Traps
Choosing on first cost alone; mixing capital and operating treatment; comparing undiscounted cash flows; treating depreciation as a cash outflow; assuming every favorable variance is good, when underspend can be deferred maintenance.