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APPENDIX 12B. GOVERNMENT REGULATORY IMPACT MODEL

TABLE OF CONTENTS

12B.1 INTRODUCTION AND PURPOSE.................................................................... 12B-1

12B.2 MODEL DESCRIPTION ..................................................................................... 12B-1

12B.3 DETAILED CASH FLOW EXAMPLE............................................................... 12B-4
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APPENDIX 12B. GOVERNMENT REGULATORY IMPACT MODEL

12B.1 INTRODUCTION AND PURPOSE

The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the 

impacts of energy conservation standards on manufacturers. The basic mode of analysis is to 

estimate the change in value of the industry following a regulation or a series of regulations. The 

model structure also allows an analysis of multiple products with regulations taking effect over a 

period of time, and of multiple regulations on the same products.

Industry net present value is defined, for the purpose of this analysis, as the discounted 

sum of industry free cash flows plus a discounted terminal value. The model calculates the 

annual cash flows and then determines the present value of those cash flows both without an 

amended energy conservation standard (i.e., the base case) and under different trial standard 

levels (TSLs).

Output from the model consists of summary financial metrics, graphs of major variables, 

and, when appropriate, access to the complete cash flow calculation.

12B.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standard annual cash flow analysis that uses 

manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters 

as inputs and accepts a set of regulatory conditions such as changes in costs and investments.

The analysis is separated into two major sections: income and cash flow. The income calculation 

determines net operating profit after taxes. The cash flow calculation converts net operating 

profit after taxes into an annual cash flow by including investment and non-cash items. Below 

are definitions of listed items on the printout of the output sheet (see section 12.B.3).

Unit Sales: Total annual shipments for the industry were obtained from the National Impact 

Analysis Spreadsheet;

Revenues: Annual revenues - computed by multiplying unit prices at each efficiency level by 

the appropriate manufacturer markup;

Labor: The portion of cost of goods sold (COGS) that includes direct labor, commissions, 

dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and 

assembly labor up-time; 

Material: The portion of COGS that includes materials;
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Overhead: The portion of COGS that includes indirect labor, indirect material, energy use,

maintenance, depreciation, property taxes, and insurance related to assets. While included in 

overhead, the depreciation is shown as a separate line item;

Depreciation: Annual depreciation computed as a percentage of Revenues. While included in 

overhead, the depreciation is shown as a separate line item;

Stranded Assets: In the compliance year of the standard, a one-time write-off of net property, 

plant, and equipment (PPE) assets to account for the book value of these assets that would 

have enjoyed a longer life if not for the standard;

Standard SG&A: Selling, general, and administrative costs are computed as a percentage of 

Revenues;

R&D: the GRIM separately accounts for ordinary research and development (R&D) as a 

percentage of Revenues;

Product Conversion Costs: Product conversion costs are one-time investments in research, 

development, testing, marketing, and other costs focused on making equipment designs 

comply with the new energy conservation standard. The GRIM allocates these costs over the 

period between the standard’s announcement and the effective date;

Earnings Before Interest and Taxes (EBIT): Includes profit before deductions for interest 

paid and taxes;

EBIT as a Percentage of Sales (EBIT/Revenues): the GRIM calculates EBIT as a percentage 

of sales to compare with the industry’s average reported in financial statements;

Taxes: Taxes on EBIT are calculated by multiplying the tax rate contained in Major 

Assumptions by EBIT;

Net Operating Profits After Taxes (NOPAT): Computed by subtracting Cost of Goods Sold, 

SG&A, R&D, Product Conversion Costs, and Taxes from Revenues;

NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

Depreciation repeated: Depreciation and Stranded Assets are added back in the Statement of 

Cash Flows because they are non-cash expenses;

Change in Working Capital: Change in cash tied up in accounts receivable, inventory, and 

other cash investments necessary to support operations is calculated by multiplying working 

capital (as a percentage of revenues) by the change in annual revenues;

Cash Flow From Operations: Calculated by taking NOPAT, adding back non-cash items 

such as a Depreciation, and subtracting out Change in Working Capital;
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Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to 

maintain and replace existing production assets, computed as a percentage of Revenues;

Capital Conversion Costs: Capital conversion costs are one-time investments in property, 

plant, and equipment to adapt or change existing production facilities so that new product

designs can be fabricated and assembled under the new regulation;

Capital Investment: Total investments in property, plant, and equipment are computed by 

adding Ordinary Capital Expenditures and Capital Conversion Costs;

Free Cash Flow: Annual cash flow from operations and investments; computed by 

subtracting Capital Investment from Cash Flow from Operations;

Terminal Value: Estimate of the continuing value of the industry after 2047. Computed by 

growing the Free Cash Flow in year 2047 at a constant rate in perpetuity;

Present Value Factor: Factor used to calculate an estimate of the present value of an amount 

to be received in the future;

Discounted Cash Flow: Free Cash Flows multiplied by the Present Value Factor. For 2047

the discounted cash flow includes the discounted Terminal Value; and

Industry Value thru 2047: The sum of Discounted Cash Flows.
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12B.3 DETAILED CASH FLOW EXAMPLE

Base Yr Ancmt Yr Std Yr

Industry Income Statement 2013 2014 2015 2016 2017 2018 2019 2020

Revenues $ 77.9 $ 76.3 $ 77.6 $ 79.5 $ 82.3 $ 83.2 $ 83.703 $ 84.1

- Materials $ 31.7 $ 31.1 $ 31.6 $ 32.4 $ 33.5 $ 33.9 $ 34.104 $ 34.3

- Labor $ 7.0 $ 6.9 $ 7.0 $ 7.2 $ 7.4 $ 7.5 $ 7.536 $ 7.6

- Depreciation $ 2.3 $ 2.3 $ 2.3 $ 2.4 $ 2.5 $ 2.5 $ 2.511 $ 2.5

- Overhead $ 19.5 $ 19.1 $ 19.5 $ 19.9 $ 20.6 $ 20.9 $ 20.987 $ 21.1

- Standard SG&A $ 8.8 $ 8.6 $ 8.7 $ 9.0 $ 9.3 $ 9.4 $ 9.432 $ 9.5

- R&D $ 2.1 $ 2.1 $ 2.1 $ 2.2 $ 2.2 $ 2.3 $ 2.273 $ 2.3

- Product Conversion Costs $ - $ - $ 0.1 $ 0.1 $ 0.1 $ 0.0 $ - $ -

- Stranded Assets $ - $ - $ - $ - $ - $ - $ - $ -

Earnings Before Interest and Taxes (EBIT) $ 6.4 $ 6.3 $ 6.3 $ 6.4 $ 6.6 $ 6.8 $ 6.9 $ 6.9

EBIT/Revenues 8.2% 8.2% 8.1% 8.1% 8.0% 8.2% 8.20% 8.2%

- Taxes $ 1.9 $ 1.8 $ 1.8 $ 1.9 $ 1.9 $ 2.0 $ 2.0 $ 2.0

Net Operating Profit after Taxes (NOPAT) $ 4.5 $ 4.4 $ 4.5 $ 4.5 $ 4.7 $ 4.8 $ 4.9 $ 4.9

Cash Flow Statement 

NOPAT $ 4.5 $ 4.4 $ 4.5 $ 4.5 $ 4.7 $ 4.8 $ 4.9 $ 4.9

+ Depreciation $ 2.3 $ 2.3 $ 2.3 $ 2.4 $ 2.5 $ 2.5 $ 2.5 $ 2.5

+ Loss on Disposal of Stranded Assets $ - $ - $ - $ - $ - $ - $ - $ -

- Change in Working Capital $ - $ (0.1) $ 0.1 $ 0.1 $ 0.2 $ 0.1 $ 0.0 $ 0.0

Cash Flows from Operations $ 6.9 $ 6.8 $ 6.7 $ 6.8 $ 7.0 $ 7.3 $ 7.3 $ 7.4

- Ordinary Capital Expenditures $ 2.3 $ 2.3 $ 2.3 $ 2.4 $ 2.5 $ 2.5 $ 2.5 $ 2.5

- Capital Conversion Costs $ - $ - $ - $ - $ - $ - $ - $ -

Free Cash Flow $ 4.5 $ 4.6 $ 4.4 $ 4.4 $ 4.5 $ 4.8 $ 4.8 $ 4.9

Discounted Cash Flow

Free Cash Flow $ 4.5 $ 4.6 $ 4.4 $ 4.4 $ 4.5 $ 4.8 $ 4.8 $ 4.9

Terminal Value $ - $ - $ - $ - $ - $ - $ - $ -

Present Value Factor 0.000 1.000 0.921 0.848 0.781 0.720 0.663 0.611

Discounted Cash Flow $ - $ 4.6 $ 4.0 $ 3.7 $ 3.5 $ 3.4 $ 3.2 $ 3.0

INPV at TSL 2 $ 66.2