# 77:

Water Heater Manufacturer Impact Analysis

Draft Report

U.S. Deparbnent of Energy Office ofCodes and Standards 1000 Independence Ave., SW Washington, DC

Date: June 7,1999

### Table of Contents

Executive Summary

........................................................................................................ 1 1.0 Manufacturer Impact Analysis Methodology

......................................................... 6

1.1. Phase 1: Industry Profile and Issue Identification................................................6 1.2. Phase 2: "Strawman" Industry Cash Flow Analysis

............................................ 7 1.3. Phase 3: Manufacturer Interview Process

........................................................... 7 1.4. Phase 4: Industry Cash FlowAnalysis

................................................................ 7 2.0 Manufacturing Impact Analysis Results

................................. .......................... 8

2.1. Industry Profile

.......... .................................................................... 8

2.1.1. Current Manufacturer Market Shares and Characteristics

.................................................... 8 2.1.2. Industry Shipments.......................................................................................................... 10 

### 2.2. Manufacturer Impact Analysis Interview

.......................................................... 13

2.2.1. Flammable Vapor Ignition Prevention.............................................................................. 14 2.2.2. Phase-Out ofHCFC 141b As A Blowing Agent forPolyurethane Foam Insulation .......... 15 

### 2.3. Industry Cash Flow Analysis............................................................................ 17

2.3.1. Manufacturing Costs........................................................................................................ 17 2.3.2. Variable Costs
................................................................................................................. 18 2.3.3. Capital Investments/Product Conversion

.......................................................................... 19 2.3.4. Financial Inputs

............................................................................................................... 20 2.3.5. Shipments
....................................................................................................................... 20 2.3.6. Cash Flow Impacts

.......................................................................................................... 20 

### 2.4. Impacts on Manufacturing Capacity, Plant Closures and Loss ofCapital Assets27 2.5. Employment Impacts Assessment

........................................ .............. 28 2.6. Impact on Small Manufacturers........................................................................ 29 2.7. Competitive Impacts Assessment

............................ .......................... 29

2.7.1. Global Competition

......................................................................................................... 30 

### 2.8. Other Comments

.............................................................................................. 30

2.8.1. Manufacturer's Comments on Consumer Utility............................................................... 30

### ListofTables

Table 1: Trial Standards Levels................................................................................................................. 1 Table 2: Investments toM eet Trial Standard Levels

........................................................ 1 Table 3: Expected Impacts on Manufacturers

............................................................................................ 3 Table 4: Impacts on Employment Levels...................................................................................................3 Table 5: Impacts on Capacity....................................................................................................................4 Table 6: Impacts on Small Manufacturers

................................................................................................. 5 Table 7: Effect on Global Competition......................................................................................................5 Table 8: List ofWater Heater Manufacturers

........ ...................................................... 9 Table 9: Manufacturer Sub-groups.......................................................................................................... 10 Table 10: Shipment and Value ofHousehold Water Heaters in 1997

....................................................... 11 Table 11: Gas Variable Costs and Options

........................................................ 18 Table 12: Electric Variable Costs and Options

........................................ ........ 18 Table 13: Oil Variable Costs and Options

........................................................ 19 Table 14: Gas Capital and Product Conversion Costs

.............................................................................. 19 Table 15: Electric Fixed Capital and ProductConversion Costs

................................... ............. 19 Table 16: Oil Fixed Capital and Product Conversion Costs...................................................................... 19 Table 17: Financial Inputs for GRIM

...................................................................................................... 20 Table 18: Business Scenario 1: Results

................................................................................................... 21 Table 19: Business Scenario 2 Results

.................................................................................................... 22 Table 20: Business Scenario 3 Results

.................................................................................................... 24 Table 21: Business Scenario 1

................................................................................................................ 25 Table 22: Business Scenario 2

................................................................................................................ 25 Table 23: Business Scenario 3

................................................................................................................ 26 Table 24: Impacts on Capacity................................................................................................................ 27 Table 25: Impacts on Employment Levels............................................................................................... 29 Table 26: Impact on Small M anufacturers

............................................................................................... 29 Table 27: Effect on Global Competition.................................................................................................. 30

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### Listof Figures Figure 1: Residential Water Heater Market Shares

........................................ .......................... 9 Figure 2: Historical Trend in Value ofShipments.................................................................................... 11 Figure 3: Historic Revenue perHeater
........................................ .......................... 12 Figure 4: Outlet Division for 1997 (Millions ofResidential Water Heaters)

............................................. 13 Figure 5: Business Scenario 1: Relationship ofCostto the Dealer/Distributor toInvestments................... 22 Figure 6: Business Scenario 2: Relationship ofCostto theDealer/Distributor toInvestments................... 23 Figure 7: Business Scenario 3: Relationship ofCost to theDealer/Distributor toInvestments................... 24 Figure 8: Short Term Cash Flows for Business Scenario 3....................................................................... 26

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### Executive Summary In accordance with the Energy Policy and Conservation Act (EPCA) as amended, the U.S. Department ofEnergy (DOE or Department) is currently in the process ofrevising the minimum energy-efficiency levels for residential water heaters. DOE is currently analyzing minimum water heater standards forresidential electric, natural gas and oil water heaters. This report assesses the financial and employment impacts ofapotential new standard for four trial standards levels for each fuel type. The four trial standards levels, and the corresponding energy factor equations, are shown inTable 1. Table 1: Trial Standards Levels 1 0.95-0.00132V 0.63-0.0019V 0.60-0.0019V

_____ 2 

### I 0.96-0.00132V 0.66-0.0019V 0.61-0.0019V 3 0.97-0.00132V 0.69-0.0019V 0.64-0.0019V 4 0.97-0.00132V 0.78-0.0019V 0.67-0.0019V 

### This analysis focuses on financial and non-financial impacts ofthe various standard levels. Financial analysis based on expected future cash flows as used in thisreport is straightforward and is themethod most commonly used as thebasis for business decisions. The annual cash flow analysis is used as a measure ofpotential investment acceptability by determining atotal value today ofthe future cash flows, implicitly including the cost ofcapital. In addition to financial impacts, a wide range of quantitative andnon-qualitative effects will occurfollowing adoption ofa standard requiring major changes towater heater manufacturing practices. Some examples include: * Future viability ofmanufacturers * Impacts on employment levels * Impacts on product pricing Additionally, the proposed energy efficiency standards arejust one facet, albeit an important one, ofthe increased pattern ofregulations and other factors facing the water heater industry. Beyond energy efficiency standards, water heater manufacturers face government actions forcing them to eliminate HCFC's as a blowing agent for foam insulation and the required production ofa flammable vaporresistant natural gas water heater. The manufacturers believe the overall impact ofthese regulations, in addition to energy efficiency standards, couldbe significant, given the limitedresources and overlapping schedule requirements. The aggregate investment estimatedby themanufacturers to meet each ofthe four trial standard levels, including the coststo meetthe above-mentioned additional regulations (represented by cumulative regulations) is shown inTable 2. Standards only represent the investments neededto meet theenergy efficiency level ofthe trial standard level. Cumulative includes the investments required for energy efficiency improvement, changes to anewblowing agent (assumed waterbased) and the development and manufacture ofaflammable vaporresistant natural gas water heater. Table 2: Investments to Meet Trial Standard Levels

-rmnm~ *.. *. . S~Standards Only Cumulative Regulations I -- 1 ---- - -

_ $ 7.84 $111.95 2 $ 59.65 $165.68

___ 3 $__ 145.80 $253.61 4 $266.32 $368.80 

### The investments for cumulative regulations arepotentially large given the current profitability ofthe water heater industry, estimated tobe $41 million (1998) after taxes on sales of$1.3 billion. Definition of Business Scenarios 

### Financial impacts were evaluated using different scenarios to characterize uncertainty in future industry shipments and industry competitive dynamics (primarily low manufacturer operating margins). Three different regulatory scenarios were examined. 1. Cash flow assuming no government regulations, i.e. status quo continues. This case provides a current industry value to beused as abenchmark. (Base Case) 2. Cash flow assuming only energy efficiency regulations (StandardCase). 3. Cash flow assuming all government regulations facing thewater heater industry (i.e. flammable vapor design requirements, HCFC foaming agent phase-out and energy efficiency standards) (CumulativeCase), Additionally, the ability ofmanufacturers torecover the investments required for each of these cases was examined inthree business scenarios: i. The average costtothe dealer/distributor needed for all water heaters sold tomaintain the industry's current value (BusinessScenario1). 2. The average cost to the dealer/distributor needed for all water heaters sold to recover variable costs andmarkup only (lossoffixed cost investment) (BusinessScenario2). 3. The average cost to the dealer/distributor based on the water heatermanufacturer's expected costtothe dealer/distributor and operating performance, based on comments received during the interview process (BusinessScenario3). Impacts on Cash Flows 

### The potential return earned by the water heater industry, represented by the industry value or industry net presentvalue (INPV), is directly related to the manufacturers' cost to the dealer/distributor ofthe water heaters. Since all five ofthe major manufacturers, which account for over 95 percent ofall shipments, produce both natural gas and electric water heaters, which account for over 99 percent ofall residential waterheaters sold, the average costtothe dealer/distributor ofwater heaters is discussed. As prices increase from the current average costto the dealer/distributor of$156.61, the industry can begin torecoup its extra manufacturing costs and conversion expenses. Table 3below shows the expected decrease in INPV and the average waterheater cost tothe dealer/distributor for all fuels based on Business Scenario 3, which represents results based on manufacturers comments.

2Table 3: Expected Impacts on Manufacturers Regulatory Scenario: Cumulative Standard Base Case Cumulative Change in Weighted Average Cost to the Level INPV (millions) INPV (millions) INPV Dealer/Distributor 1 $ 295.29 $ 267.30 -9.50%$ 182.04 2 -$ 295.29 $ 253.87 -14.0% $195.68 3 $ 295.29 $ 231.89 -21.5% $215.74 4 -$ 295.29 $ 203.09 -31.2% $293.38 Regulatory Scenario: Standards Standard Base Case Standard Change in Weighted Average Costto the Level INPV (millions) INPV (millions) INPV Dealer/Distributor 1 $ 295.29 $ 293.33 -0.7% $ 161.90 2 -$ 295.29 $ 280.38 -5.1% $ 175.36 3 -$ 295.29 $ 258.84 -12.3% $ 195.26 4 $ 295.29 $ 228.71 -22.5% $ 273.36 Impacts on Employment 

### The impact ofHCFC-141b foaming agentphase-out and flammable vapor resistant gas water heaters on employment levelswas considered minimal by all interviewed manufacturers. However, all interviewed manufacturers indicated that atransition to plastic tanks for electric waterheaters wouldresult in largejob losses. Atransition to side-arm water heaters could also result in domesticjoblosses. Table 4: Im acts onEmloment Levels No expected major impact on employment levels 2 No expected major impact on employment levels 3 Plastictank electric units require a manufacturing process that obsoletes current electricwater heater manufacturing lines. This could potentially lead tosome manufacturers abandoning theelectricwater heater market. While some of the employmentwould shiftto manufacture natural gaswater heaters, this would reduce employment levelssubstantially. 4 Side arm gas water heaters would require large investments and reduce manufacturing capacity. This reduction in capacitywould also beaccompanied with a reduction in employment levels.
Impacts on Manufacturing Capacity 

### In general, manufacturers expect to meet future demand as long as trial standard levels three and four, potentially requiring side-arm gas waterheaters and plastic tank electric units, are notmandated. Currently, the US industry has far more manufacturing capacity than the domestic market can absorb. Manufacturers estimated the industry is operating at anywhere from 60 to 80 percent oftotal capacity.

3Table 5: Impacts on apacit 1 Noexpected major impact on capacity. While increased cavity sizeswill initially increase scrap rates due tofoaming errors, manufacturers expect to meet the challenge. 2 No expected major impact on capacity beyond the issues discussed intrial standard level one. 3 Plastictank electric unitsrequire amanufacturing process thatobsoletes current electricwater heater manufacturing lines. The required capital investments to convert existing or build newfacilities are expected tocause some manufactures to cease the production of electricwater heaters. 4 Side arm gas water heaters would require large investments and reduce manufacturing capacity. Manufacturers expressed concern thatforeign competitors who already mass-produce such heaters would gainaccess tothe US market and displace domestic producers. Side-arm water heaters are no longer manufactured inthe US because of lowdemand. 

### Due tothe changes in foaming agent and flammable vapors, regardless ofwhat efficiency standard is chosen, it is likely nearly every product line would have to beredesigned, recertified, and launched for sale inthe US. One manufacturer claimed itwould take them two years to re-tool, which would give the manufacturer ayear to finalize designs before the new standards go into effect. Several manufacturers indicated apreference tore-tool for new foaming agents, proposed energy-efficiency standards and flammable vaporresistant designs at the same time, to avoid any redundant efforts andlimit costs. Impacts on Small Manufacturers 

### Small manufacturers ofwater heaters inthe United States concentrate on niche products such as electric only, solar, oil-fired, indirect, or marine systems, etc. Depending on the company, more orless ofthe product line willbe affected by the proposed rulemaking. Small manufacturers use a variety ofinsulating and lining materials, which include stone, fiberglass, and a variety offoams. At least one domestic producer already uses waterblown foam intheir water heaters. As efficiency is a strong selling point for these manufacturers, investments will be required ifmanufacturers decide tocontinue significantly surpassing energy efficiency standard levels. However, any required retooling would be amortized across amuch smaller volume than that ofa larger competitor, potentially having a larger impact. Thelow volumes inthese niches necessitate somewhat different manufacturing processes than the ones used by larger commodity producers. Consequently, these manufacturers will be impacted differently than the commodity producers. It is expected small manufacturer's material and labor costs will increase more compared to their larger competitors because ofsupplier discounts andproduction efficiencies. Table 6 below describes the expected impact on small manufacturers.

4Table 6: Im actson Small Manufacturers _1__I __________No expected major impact beyond what will be seen by the rest ofthe industry 2 As many small manufacturers use increased efficiency as a selling point, movement ofthestandard to leveltwo, and more sowith the higherefficiency trial standards levels,may eliminatethe market differentiation the small niche manufacturers have. This could potentially reduce sales dramatically and force them out of business. 3 Plastictank electricwater heaters are probably impossibleto achieve forsmall competitors unless licensing feesand market conditions are very favorable.Thus, any efficiencystandard level requiring technology use willmost likely cause small manufacturers to abandon the electric market affected by the rulemaking. 4 Side arm gas water heaters would require large investments and may also prompt small manufacturers to leave that segment of the residential market. Competitive Impacts Assessment 

### Changes in industry concentration-the distribution ofmarket share among manufacturers-can signal potential reductions in competition. Under reduced competition, firms arebetter able touse their market power toincrease profits. Firms may exert market power by raisingprices orreducing quality, service, and other aspects ofthe productthat consumers value. The water heater industry is a fiercely competitive market. Several manufacturers indicated the fiercely competitive market might lead to a market exit ofone or more manufacturers. Manufacturers also stated the array of regulations facing water heater manufacturers could speed up any market exit. Global competition currently has little impact onthe overall US water heater industry. One multinational manufacturer stated that large increases in labor costs would prompt them to shiftmore production abroad. Some purchased parts used inwater heaters, such as gas controls, are already manufactured outside the United States. The long-term trend to manufacture labor-intensive components in low-labor cost areas is largely independent ofany energy efficiency standard. However, the majority ofparts inwater heaters are still purchased locally. Table 7: Effecton Global Competition 41________ 

### ~~~No additionalexpected major impact 2 No additionalexpected major impact 3 No additionalexpected major impact 4 Side-arm gaswater heaters are no longer manufactured in the United States. Thus, any energy efficiency standard needing side-arm water heaters to meet itcould effect market entry offoreign manufacturers who already mass-produce such heaters.

51.0 Manufacturer Impact Analysis Methodology 

### In determining whether a standard is economicallyjustified, the Secretary ofEnergy is statutorily required toconsider "the economic impact ofthe standard on the manufacturers and onthe consumers oftheproducts subject to such a standard." The legislation also calls for an assessment ofthe impact ofany lessening ofcompetition as determined in writing by the Attorney General. The purpose ofthe Manufacturer Impact Analysis (MIA) is toprovide information that can beused to evaluate these impacts. The MIA estimates the financial impact ofstandards on manufacturers and calculates impacts on employment and manufacturing capacity. The MIA was conducted in fourphases. Phase 1,Industry Profile and Issue Definition, consisted oftwo activities, namely, preparation ofanindustry characterization and the conduct ofan issue identification interviews. The second phase, Industry Cash Flow, had as its focus the larger industry. In this phase, the Government Regulatory Impact Model (GRIM) was used toprepare a "strawman" industry cash flow analysis. Here the Department usedpublicly available information developed in Phase 1and the data provided by manufacturers tothe rulemaking processto adapt the GRIM structure to facilitate the analysis ofnew standards. In Phase 3, Manufacturer Interview Process, the "strawman" cashflow wasused to discuss with individual manufacturers the impact of the standard levels on industry cash flows. Phase 3also entailed documenting additional impacts on employment and manufacturing capacity through the interview process. Finally in Phase 4, Industry Cash Flow,ADL aggregated the information from the interview process withthe data submittal ofGAMA to develop an industry cash flow. 1.1. Phase 1: Industry Profileand Issue Identification 

### Phase 1ofthe MIA consisted oftwo activities, namely, preparation ofanIndustry Characterization, and the conduct ofissue identification interviews. Prior to initiating the detailed impact studies, the Department received input onthe present andpast structure and market characteristics ofthe water heater industry. This activity involved both quantitative and qualitative efforts to assess the industry andproducts to be analyzed. Issues addressed included manufacturer market shares and characteristics, trends in number offirms, the financial situation ofmanufacturers, and trends inwater heater characteristics and markets. To further assist inperforming the Industry Profile and to define key issues, the Department conducted a series ofinterviews with waterheater manufacturers inlate 1997. The interviews andreview ofpublic literature suggested the following guidelines to assess the impacts ofanew water heater standard: 1. The analysis should recognize the increasingly competitive nature ofthe water heater industry. 2. The MIA should include consideration ofimpacts ofotherregulatory requirements facing water heater manufacturers. The Department recognized manufacturers are

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### facing significant issues relatedto the HCFC refrigerant phase-out and the voluntary adoption offlammable vaporresistant gas water heaters. 1.2. Phase 2: "Strawman" IndustryCash FlowAnalysis Phase 2 ofthe MIA focuses on the "larger" industry. The analytical tool used for calculating the financial impacts ofstandards onmanufacturers is the Government Regulatory Impact Model (GRIM). In Phase 2, GRIM was used to perform a "strawman" industry cash flow analysis. Forthe "strawman," the Department prepared a listoffinancial values tobe used inthe GRIM industry analysis. These were calculated by studyingpublicly available financial statements ofwater heater manufacturers. Adetailed definition offinancial inputs and their values for a "strawman" water heater manufacturer waspresented inthe document entitled "Financial Inputs to GRIM for the Water Heater Rulemaking Analysis." This document was presented atthe public workshop held onNovember 1998. Manufacturing costs-labor, materials, depreciation/tooling, etc.- were obtained from the GAMA submittal to the Department for various design options. Finally, inpreparing the "strawman" industry cash flow analysis, the Department used the same shipment scenarios developed for the National Energy Savings (NES) spreadsheet. The "strawman" was used to provide a starting point from which manufacturers could develop more recent and accurate inputs. The intent ofthe "strawman" was to use "placeholder" values inorder to illustrate the working ofthe GRIM spreadsheet and to elicit comment onthe modeling inputs from manufacturers. 1.3. Phase 3: Manufacturer Interview Process The Department conducted detailed interviews with water heater manufacturers in February andMarch 1999 togain insight intothe potential impacts ofstandards. During these interviews, the Department solicited the information necessary to evaluate cash flows and to assess employment and capacity impacts. The interview process played akey role intheMIA, since it provided an opportunity for manufacturers toprivately expresstheir views onimportant issues andprovide confidential information needed to assess financial, employment and other business impacts. To support the development ofcash flows, an interview guide solicited information onthe possible impacts ofnew standards on manufacturing costs, product prices, and sales. The evaluation ofthe possible impacts on direct employment and manufacturing assets also drew heavily onthe information gathered during the interviews. The interview guide solicited bothqualitative and quantitative information. Supporting information was requested whenever applicable. 1.4. Phase 4: Industry Cash Flow Analysis 

### During the interview process, the results ofthe "strawman" cash flow analysis were discussed with the manufacturers. In mostcases, the manufacturers felt the "strawman" analysis closely represented the industry as a whole and their organization inparticular.

7

### Where manufacturers differed from the "strawman," the financial inputs were adjusted to account for these differences. Generally, ADL foundclose agreement among manufacturers in development ofthe overall impact ofthe various standard levels. The analysis discussed inthisreport is based on the financial inputs provided by manufacturers. 2.0 Manufacturing Impact Analysis Results 2.1. Industry Profile ADL developed an initial industry characterization using information from relevant industry and market publications, industry trade organizations, company financial reports, andproduct literature. This industry characterization report helped ADL indeveloping the "strawman" industry cash flow analysis and also aided inthe development ofa detailed and focused interview guide to perform the MIA. Specifically, shipment information was obtained from publicly available Current Industrial Reports (CIRs) published by the U.S. Bureau ofCensus. Financial and cost information was obtained from the Census ofManufactures (another Bureau ofCensus publication), SEC 10-K statements, and Dun & Bradstreet reports. 2.1.1. Current Manufacturer Market Shares and Characteristics Table 8lists themajor water heater manufacturers and their characteristics. ADL conducted manufacturer interviews and plant visits withthem during the October to December 1997 time frame, with additional interviews in February and March 1999.

8Table 8: ListofWater Heater Manufacturers Manufacturer Characteristics American Water A subsidiary ofSouthcorp, an Australian holding company, AWHC Heater Company produces mostly residential and some commercial water heaters in its Johnson City, TN facility and sells into the wholesale and retail channel. The parent company ownsthe largest manufacturer ofwater heaters in Australia and also manufactures water heaters in New Zealand and China. AO Smith The largestmanufacturer ofcommercial water heaters. AO Smith also produces residential units. The water systems technology division manufactures in the US, Canada, Mexico, theNetherlands, and China. AO Smithonly sells through the wholesale channel. Bradford-White Producer ofcommercial andresidential, natural gas, oil andelectric water heaters. Primary manufacturing facility is in Middleville, MI. Sells only through the wholesale channel. Rheem Second largest manufacturer ofresidential and numbertwo producer of commercial water heaters. Rheem produces residential products in Mexico although its largest facility is still in Montgomery, AL. Subsidiary Water Heater Innovations manufactures the Marathon plastic tank electric water heaters. Rheem sells into the wholesale and retail channel State Industries State is estimated tobe the largest manufacturer ofresidential water heaters, with its production facility in Ashland City, TN, with components manufacturing in Franklin, TN. Some State electric water heaters feature steeltanks with an inner plastic lining. State sells into the wholesale and retail channel. Bock Water Located in Madison, WI, one ofthe largest oil water heater manufacturers Heaters in the US. Bock also manufactures indirect water heaters Vaughn Vaughn manufactures stone-lined electric water heaters in its Salisbury, Manufacturing MA plant. Vaughn usesexclusive distribution to the utility industry, sold mainly on their long life and the load controls that he attaches to each tank. Heat Transfer Based in East Freetown, MA, Heat Transfer Products manufactures Products commercial natural gas water heaters, residential and commercial electric and oil water heaters, as well asmarine and indirect waterheaters and copper coil heat exchangers. Figure 1: Residential Water Heater Market Shares
1997Water Heater Market Share Bradford-White 13%

AO Smith 15%

American

17% Rheem 27% source: Appliance Magazine (1997)

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### The interviews conducted in 1997/1999 suggested product mix, firm size, location of production facilities, and level ofvertical integration were possible characteristics to be used in defining sub-group categories. For purposes ofthe MIA and after consultation with industry, ADL elected to group manufacturers exhibiting similar product mix characteristics. This aggregation scheme was selected as itrepresents the most comprehensive way toreport the variation ofimpacts on different manufacturers while ensuring confidentiality ofindividual manufacturers' positions. Based on information presented in Table 9, ADL divided themanufacturers into the following two sub-groups:
Table 9: Manufacturer Sub-groups 

### Sub-group 1: LargeManufacturers Sub-group 2: Small Manufacturers Manufacturers ofboth electric and natural gas Manufacturers that produce oil; Manufacturers water heaters that produce less than 1%ofresidential electric and gaswaterheaters (List below is representative, not inclusive). 

### * Rheem * 

### Bock * American * 

### Heat Transfer * State · Vaughn * Bradford White * AO Smith The majority ofdiscussion will focus onthe entire industry, which is dominated by subgroup 1.All cash flow impacts presented inthisreport arerepresentative ofthe five large manufacturers. Small manufacturers ofwater heaters inthe United States concentrate on niche products, all estimated at lessthan 1% ofwaterheaters sold, such as electric only, solar, oil-fired, indirect, or marine systems, etc and typically provide product through different channels ofdistribution thanthe sub-group 1manufacturers. No cash flow impacts were calculated for sub-group 2,however, expected impacts on sub-group 2 is discussed in section 2.6, impacts on small manufacturers. 2.1.2. Industry Shipments Current Industrial Reports (CIRs), published by the U.S. Bureau ofCensus, provide detailed data onquantity and total value ofU.S. shipments ofwater heaterproducts. The census bureau uses SIC codes 36391 and 36392 to describe thewater heater industry. According to CIR data, 9.4 million residential water heaters, valued at $1.3 billion, were shipped in 1997. Figure 2 presents the trend in the dollar value ofmanufacturers' shipments ofhousehold water heaters over theperiod 1990through 1997.

10Figure 2: HistoricalTrend in Value ofShipments

900- E . w ~ : 800

200
100

- M 19.

00 1990o 1991 1992 1993 1994 1995 1996 1997
source: US Census Table 10: Shipment and Value ofHousehold Water Heaters in1997

approximately40,000 to 60,000 oil water3heat Dippe eh Electric: Storage 4,300.8 550.1 41% $127.91 Electric: Non-storage 292.1 28.7 2% $98.25 Gas: 4,691.4 732.2 55% $156.07 Oil: NIA NIA NIA NIA Other 107.3 20.8 2% $193.85 Total 9391.6 1331.89 source: US Census Note: Other includes indirect, wood, solar, and marine. 

### Oil shipments are not available from the CIR. It isestimated by industry sourcesthat approximately 40,000 to 60,000 oil waterheaters are shipped each year.Figure 3: HistoricRevenue per Heater 240 230 - 220 G- -A- Gas WH

- CIR 

### ~210~

- .. .i / \ U E- .- Elec WH

- CIR OtherWH -CIR

10 7 70
.. a:160- . ..

150 - 140 130 -

__ 120 1992 1993 1994 1995 1996 1997 Year source: Current Industrial Reports (US Census) 

### The average revenue perheater is shown in Figure 3. The revenue for electrical units has been flat for anumber ofyears while natural gas unit prices spiked in 1995 before returning to 1992-1994 levels. The increased price in 1995 for other and natural gas water heaters is unknown. One explanation would be an increase inthe number ofcommercial (i.e. higher price) water heaters sold in 1995. The data for the 'other' type units contains oil, wood, and other types ofheaters. The vast majority ofwater heaters currently purchased arereplacements, estimated by the manufacturers to be 80 to90 percent ofall sales. Forthe pastdecade, the overall volume ofwater heaters being distributed through the wholesale channel has been relatively flat, while large retailers increased their volumes by 50%. This has had two significant financial impacts onwater heater manufacturers: * Markups tend tobe lower selling intothe retail channel compared to selling to a wholesale channel. * Large retailers offertheir customers money-back guarantees and charge the manufacturer for returned goods, whetherthe good had a manufacturing defect or not. This has led to warranty costs inthis channel tobe higher than the wholesale channel. These two factors currently have created an environment ofaggressive pricing with increased warranty costs. This growth ofthe retail market has affected theprofitability of all water heater manufacturers.

12Figure4: Outlet Divisionfor 1997 (Millionsof Residential Water Heaters) Exports Mobile Homes _r_ Plumbers Wholesale1 :

New Constru

Retail Outlets

Plumbers Wholesal : Replacements

Source: ADLEstimate (1998) 

### Water heaters purchased for new construction, and the majority ofwaterheaters purchased by contractors for replacement, are baseline units. Mark-ups for the baseline "commodity" water heaters tend to bemuch smaller than forthe upscale units. Manufacturers stated that increasing the energy efficiency standard eliminates this ability to "up-sell," andthis will lower profitability and/or increase baseline costs disproportionately. Manufacturers feltthis wasparticularly true for standard levels three and four. As the relatively large percentage ofsales through retailers might indicate, contractors are purchasing from these suppliers (versus plumbing wholesalers) in significant numbers. This has helped effect nearly equalprices between the two channels, as wholesalers must now compete withthe retail outlets for water heater sales. 2.2. Manufacturer Impact AnalysisInterview Department representatives visited and conducted preliminary interviews with representatives of8waterheater manufacturers during the fall of 1997. Thefollowing manufacturers were included inthis series ofpreliminary interviews. * American Water Heating Group, Johnson City, TN * A.O. Smith, McBee SC

· Bradford White, Middleville, MI * Bock, Madison WI * Heat Transfer Products, EastFreetown MA * Rheem, Montgomery, AL * State Industries, Ashland City, TN * Vaughn Manufacturing, Salisbury MA The interviews included open-ended discussions based on the items outlined inthe interview guide and are included inthis document as Attachment A.

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### There was general consensus thatthe most important phenomenon affecting the character ofthe water heater industry are newregulations set totake effect over the next five years. Inparticular, these will address the prevention offlammable vapor ignition with gas water heaters and the phase-out ofHCFC 141b as the insulating foam blowing agent. A second round ofinterviews was conducted concerning the cash flow analysis only during February-March 1999. The following manufacturers participated inthese interviews: * American Water Heating Group, Johnson City, TN * A.O. Smith, McBee, SC * Bradford White, Middleville, MI * Rheem, Montgomery, AL A copy ofthe interview guide is included inthis document as Attachment B, and shall be referred to asthe Manufacturer Interview Guide. During thisinterview, the manufacturers were asked to comment onthe "strawman" industry cash flow, as well as to provide any additional cost data for the various trial standard levels. Based on these comments, the financial assumptions tothe GRIM were adjusted. During the interviews, water heater manufacturers continually mentioned two potentially costly new regulations they are havingto face. These are: * Natural gas flammable vapor ignition prevention and * Phase-out ofHCFC 141b as a blowing agent for polyurethane foam insulation The technical aspects, as well as the costs associated with each, arediscussed inthe Engineering Analysis report. The following are comments on the impacts on manufacturing. 2.2.1. Flammable Vapor Ignition Prevention 

### TheU.S. Consumer Product Safety Commission considered initiating arulemaking proceeding requiring natural gas residential water heaters to be designed to prevent the ignition offlammable vapors, but chose in late 1994 to work withthe water heater manufacturers todevelop avoluntary performance standard. The waterheater industry is working on multiple design options to respond tothisproblem. Some ofthe water heater manufacturers are working throughthe Water Heater Industry Joint Research and Development Consortium and/orthe GasResearch Institute, and some are working on their own. Although development ofa satisfactory test procedure has been difficult, industry sources anticipate the American National Standards Institute (ANSI) will adopt a standard testprocedure in 1999. The industry isproceeding to construct test facilities, as well as flammable vapor resistant water heaters, in anticipation ofa standard test procedure. Meanwhile, some manufacturers have produced and are field-testing water heaters with flammable vapor ignition prevention designs, while others are testing a range ofdesign

14

### options for competitive reasons. Manufacturers have been reluctant to discuss specific designs andtheir costs ofimplementation in detail, so atthis time a value of$20/unit has been assumed asthe investmentrequired to comply with the voluntary standard. This cost was provided by the Water Heater Industry Joint Research and Development Consortium. Some lower cost designs are being considered but there is aninverse relationship between cost and commercial readiness. That is, industry sources indicate the more reliable and mature designs are at the upper end ofthe costrange, and the lower cost designs are more speculative and further from being commercially ready. There is no indication thatnew designs for flammable vapor ignitionprevention will affect energy efficiency, but the manufacturers have notyet evaluated costs ofachieving the minimum energy efficiency standard with thenew flammable vapor ignition prevention design options. 2.2.2. Phase-Out ofHCFC 141b As A BlowingAgentfor Polyurethane Foam Insulation Most residential water heaters are insulated with polyurethane foam in the space between the tank and thejacket. The insulation is foamed inplace using ablowing agent included inthe mixture. The heat ofreaction vaporizes the blowing agent, andthiscreates an expanding frothy mass that hardens quickly into closed-cell foam insulation. Currently, most water heater manufacturers use HCFC-141b, an ozone depleting substance, as the blowing agent. This HCFC will bephased outby January 1,2003. Initially, the appliance industry, including water heaters, had indicated a potential to adopt HFC-245fa, which performs nearly equal to HCFC141b, but at aprojected much higher cost. Unfortunately, according the waterheater manufacturers interviewed, the exclusive license holder for thetechnology in theUnited States has not committed to building production capacity sufficientto provide economies ofscale intime for the HCFC-141b phase-out. The entire appliance industry consumes approximately 20% ofall foaming agents and the water heater industry only a fraction thereof. The largestuser offoaming agents is the construction insulating board industry, which is expected to convert overto cyclopentane. Consequently, waterheater manufacturers do not expect any unique and inexpensive foam insulation and donot wishto depend on one exclusive supplier either. All interviewed manufacturers are expecting touse water-based foaming agents. Process control will also haveto be improvedto handle thetighter manufacturing standards the new agents will require. The higher thermal conductivity ofwater-based foaming agents will necessitate thicker insulation cavities tomeet even current energy efficiency standards. Thicker cavities exacerbate any process problems with foam, such as shrinkage, blowouts, etc., adding to production costs. While thicker cavities currently cause an increase in scrap, all manufacturers expect toreduce scrap levels as they learn to better control the process, but donot expect to returnto present levels afterthe change. As insulation thickness increase, fewer waterheaters canfit on the assembly line, be stored in awarehouse, or shipped by truck. According to one manufacturer, for every row in atruck thatis eliminated by oversized waterheaters, shipping costs increase by about

15

### 25%. The trailers the waterheaters are transported in are usually limitedto 120" in height, which further limits heights ofwater heaters. Unless amanufacturer can ship a mixture oflowboys and tall unitsto the same location, additional costswill be incurred. In the worst case, an entire layer ofwater heaters is eliminated and shipping costs increase 50%. Several manufacturers and industry stakeholders worry new waterheaters will become too large toreplace defective units easily. The most common concern is thatthicker water heaters will no longerfit through common doorways or attic hatches. Furthermore, many water heaters are installed in very tight locations, such as those found in attics, crawl spaces, manufactured housing, etc. Several manufacturers responded to such market demand by designing "zero-clearance" water heaters, which do not require any clearances to adjacent surfaces. Zero-clearance water heaters may needto bere-designed to satisfy the replacement market. 2.2.3. Evaluationof Impacts The GRIM cash flow analysis was used to capture the financial impacts ofthe antiflammability designrequirement and the elimination ofblowing agent HFC-141b. The basic assumptions and industry-supplied values for cumulative burden GRIM inputs are the same as those used for the Engineering Analysis for flammable vapors andthe conversion to water based foam. We expect design changes required for meetingthe new regulations to change: * the cost ofsales perunit * profitability as afraction ofrevenue (to the extent thatthe costchanges are not passed through directly to customers), and * Conversion capital expenditures which might be required to modify production and test facilities. There is uncertainty with regard to the financial impacts associated with selection ofa newblowing agent toreplace HCFC-141b. The same variables as above are affected, but in different ways. That is, the use ofa "drop-in" organic blowing agent would increase the cost ofmaterials forthe insulation whereas theuse ofwater could keep blowing agent costs low but would require the use ofmore insulation materials (i.e., increased cost) to meet the insulating properties oftoday's foam. Flammable vaporresistant designs and foaming agent changeovers may cause stranded assets due tothe following: * The adoption ofthe most likely flammable vaporresistant designswill necessitate a complete redesign ofthe lower part ofgas units. The tools and some equipment used to make these lower parts willbecome obsolete. Most water heaters will require thicker cavities due tothe foaming agent conversion. Thicker cavities inturn necessitate larger stamping dies for the outerjackets ofwater heaters. While it maybe possible to reuse some stamping dies, some tooling acquisitions will berequired. Thicker cavities will also require some equipment investment to handle longer spud weldments.

162.3. Industry Cash FlowAnalysis 

### The economic impact ofproposed standards on manufacturers is determined by estimating the cash flows associated withmeeting the standards and calculating avalue for those cash flows. ADL used information provided by the manufacturers and the GRIM spreadsheet to evaluate cash flow impacts ofregulations onthe industry. The GRIM spreadsheet calculates the change in INPV ofthemanufacturer(s) due to the imposition ofa regulation.INPV is defined, forthe purposes ofthis analysis, as the present value offuture cash flows for the manufacturer(s) inquestion. The basic structure ofthe GRIM is a standard annual cash flow analysis which uses price and shipment information as an input, builds on manufacturing cost information, and accepts aset of regulatory conditions as changes in costs, associated margins and investments. The model calculates actual cash flows by year and then determines the present value ofthese cash flows, forthree regulatory scenarios: 1. Cash flow assuming no government regulations, i.e. status quo continues. This case provides acurrent industry value tobe used as abenchmark. (BaseCase) 2. Cash flow assuming only energy efficiency regulations (StandardCase). 3. Cash flow assuming all government regulations facing the waterheater industry (i.e. flammable vapor design requirements, HCFC foaming agent phase-out and energy efficiency standards) (CumulativeCase) Additionally, the ability ofmanufacturers to recover the investments required for each of these cases was examined inthree business scenarios: 1. The average price needed for all waterheaters soldto maintainthe industry's current value, essentially recovering one hundred percent ofthe investments (Business Scenario1). 2. The average price needed for all waterheaters sold torecover variable costs and markup only (loss offixed cost investment, i.e. zeropercent recovery) (Business Scenario2). 3. The average price based on the waterheater manufacturer's expected price and operating performance, based on comments received during the interview process, essentially leading to recovery ofseventy-five percent ofthe investments (Business Scenario3). Some ofthe important inputs required to develop cash flow estimates and INPV are industry shipments, manufacturer costs, capital investments, and the financial operations ofthe industry. These are discussed inthe next sections. 2.3.1. Manufacturing Costs 

### In order to calculate water heater unit prices, and conversely industry revenue, incremental manufacturing costs attributable to efficiency improvements are required. In addition, the cash flow models' accuracy is contingent onthe detail in which the manufacturing costs are given.

17

### Manufacturing cost estimates are broken down intovariable and fixed costs. A detailed description ofthe development ofthe variable costs is included inthe Engineering Analysis. 2.3.2. Variable Costs 

### Variable costs include material, labor, overhead, and transportation costs. For this analysis, transportation costs represented in the Engineering analysis have been included in overhead. Variable cost development is discussed inthe Engineering Analysis section ofthe rulemaking. Table 11, Table 12, and Table 13 show the efficiency levels, variable costs, and design options, for the four trial standard levels analyzed for gas, electric, and oil waterheaters; respectively. Table 11: GasVariable Costs and Options
Current Product $75.02 $10.74 $48.02 .62-0.0019V) 2003 Baseline Water blown blowing agent, $17.04 $0.18 $1.54 (0.62 -0.0019V) flammable ignition device

__ Trial Standard Level 1 I « _ _ al Standard Level 1 Heattrap $2.75 $0.16 $0.19 (0.63-0.0019V) eattrap_________501$. 0.66-0.001r Level 2 Heattrap +78% RE +2"Insulation $10.18 $1.82 $4.99 

### (0.66-0.0019V)9 -Trial S r Level 3 Heattrap +80%RE 2.5" Insulation $14.48 $2.59 $11.49 Trial Standard Level 4 Heattrap +80%RE +3"lnsulation + (0.75-0.0019V) Side-Arm +Electronic Ignition + $93.37 $7.85 $49.26 PlasticTank Table 12: ElectricVariable Costs andOptions i: I .: . !. ! E ! Current Product $62.16 $10.57 $49.00 2003 Baseline 00.93 -0.001s V Water blown blowing agent $9.81 $0.00 $0.00 Trial Standard Level 1 Heattrap +Insulated Tank Bottom $4.87 $0.31 $1.18 (0.95-0.00132V)

_____ Trial Standard Level 2 Heattrap +Insulated Tank Bottom + $8.44 0.69 $3.99 (0.96-0.00132V) 2.5" Insulation Trial Standard Level 3 Heattrap +Insulated Tank Bottom $1 187 $11 17 (0.97-0.00132V) +3" Insulation +Plastic Tank 7 4

__ Trial Standard Level 4 Heattrap +Insulated Tank Bottom 17.74 ,$1.87 $11.17 (0.97-0.00132V) +3" Insulation+ Plastic Tank $7.____"*

18Table 13: Oil Variable Costs and tions
urrent Product $85.00 $18.25 $36.00 (0.58-0.0019V) 2003 Baseline Water blown blowing agent $3.54 $0.00 $0.00 (0.58 -.0019V) Trial Standard Level I Heattrap $2.95 $0.13 $0.05 (0.60-0.0019V)Heattrap Trial Standard Level 2 Heattrap +2.5" Insulation $8.17 $0.44 $1.69 (0.61-0.0019V) Trial Standad Level 3 Heattrap +80%RE 2.5" Insulation $14.59 $1.14 $4.35 (0.64-0.0019V) Trial Standard Level4 Heattrap +80%RE +3"Insulation (0.67-0.0019V) +Side-Arm +Electronic Ignition + $44.56 $2.34 $7.60 (0.67-0.0019V)_______Plastic Tank____________________________ 2.3.3. Capital Investments/Product Conversion 

### This analysis considers both capital investments and product conversion expense as fixed costs. Capital investment involves tooling and investment costs associated with evolving awater heater product line to meetnew production ofhigherefficiency water heaters. Product conversion investment includes the research and development and marketing of higher efficiency water heaters. Capital and product conversion costs are shown below in Table 14 through Table 16. These costs are assumed forthe entire water heater industry. Table 14: Gas Ca ital and Product Conversion Costs Cost to meet non-energy $97.00 $10.78 efficiency regulations Trial Standard Level 1 $0.36 $068 (0.63-0.0019V) Trial Standard Level 2 (0.66-0.0019V)

_ _____$13.09 $10.60 Trial Standard Level 3 $18.7 $10.78 (0.69-0.0019V)

_ _____$18.75 $ _______10.78 Trial Standard Level4 1.
. (0.75-0.0019V)

__ ___$120.79 $20.49 Table 15: Electric Fixed Capital and Product Conversion Costs Costto meet non-energy $0.00 $0.00 efficiency regulations

. Trial Standard Level 1 $540 $1.25 (0.95-0.00132V)_

_ __ 5 _40 $1.25 (0.95-0.00132V) Trial Standard Level 3 $110.98 (0.96-0.00132V) 0.97-0.00132V)

_ $ 4

.1 5 $1_______ 0 9

_________ Trial Standard Level4 $4.42 $118 (0.97-0.00132V) 4 4 2

____ Table 16: Oil Fixed Capital and Product Conversion Costs Cost to meet non-energy $0.05 $0.03 efficiency regulations

_ Trial Standard Level i $0.10 $0.05 (0.60-0.0019V)

___________ Standard Level 2 $0.10 $0.05 (0.61-0.0019V) Trial Standard Level 3 $0.76 $0.38 (0.64-0.0019V) Trial Standard Level4 $1.64 0.82 (0.67-0.0019V)_____________________1

19

### Some manufacturers are currently debt-free and operate profitably by focusing on commercial orniche products. Other manufacturers are highly leveraged or are facing steep declines in demand due to competition. Thus, access to capital inthe industry is uneven and could cause some manufacturers togo out ofbusiness iflarge expenditures were required to meet new efficiency standards. 2.3.4. Financial Inputs 

### GRIM input is firm-level financial information that can indicate the extent to which individual firms may be adversely impacted by new standards. A financial profile for each firm is developed from information contained inbalance sheets and income statements. These parameters include: * Tax rate (%): Usedto calculate thetaxes on profit before tax. * Interest rate (%): Used as the discountrate forcalculating thepresent value offuture cash flows. * Working capital as a percentage ofsales (%): Used to calculate the change inworking capital resulting from increased revenues. * Selling, General & Administration ($): Includes all non-factory costs. It is computed by adding R&D, Product Conversion, and SG&A. * R&D as apercentage ofrevenues (%): Used to compute R&D costs. * Depreciation as apercentage ofrevenues (%): Non-cash costused as a part ofthe cash flow calculation. * Variable overhead as a percentage oftotal overhead (%): Helps to separate the fixed andthe variable parts ofthe overhead costs. Table 17 illustrates arepresentative financial structure the Department used inconducting the cash-flow analysis ofthe water heater industry. This information was based on data provided by manufacturers during the February and March interviews. The original "strawman" financial inputs, alongwith their sources, are provided in Attachment C. Table 17: Financial InIutsforGRIM 

### Tax Rate 38.00% Discount Rate for INPV 7.99% Working Capital 15.65% Standard SG&A 9.00% Researchand Development 1.00% Ordinary Depreciation 3.10% OrdinaryCapital Expenditures -4.50% 2.3.5. Shipments 

### The Department used the same shipment scenarios in GRIM as developed by LBNL in theNational Energy Savings (NES) spreadsheet. 2.3.6. Cash Flow Impacts 

### Business scenarios one and two provide the boundaries for examining the financial impact onthe water heater manufacturers and for examining the increase in the costto

20

### the dealer/distributor needed to maintainthe industry value. Business scenario three represents the expected impact based onmanufacturer's comments during the interview process. When compared to base case cash flow, the impact on boththe manufacturer andthe consumer becomes apparent. Table 18through Table 20 showthe impacts for boththe standard and cumulative cases for thethree business scenarios. For Business Scenario 1,the impact on cost tothe dealer/distributor wasexamined while the industry maintains its current value. For this case, an average mark-up is determined and applied to the various fuel options to obtain a cash flow thatresults in the same industry value as the current business operations would be expected to produce. This assumes the water heater industry is allowed to operate current market conditions. These results are shown below in Table 18, along with the investments required for each scenario. Table 18: Business Scenario 1: Results Regulatory Case: Cumulative Standard Base Case Standard Investment Average Costtothe Dealer/Distributor Level INPV INPV (millions) Electric Gas Oil Weighted (millions) (millions) Average 1 $295.29 $295.29 $(111.95) $170.35 $192.74 $180.20 $ 182.57 2 $295.29 $295.29 $(165.68) $178.87 $210.54 192.56 $ 196.46 3 $-- 295.29 $295.29 $(253.61) $203.52 $227.34 $206.33 $ 216.93 4 $295.29 $ .29 29 $(368.80) $199.93 $377.59 $247.59 $ 295.12 Regulatory Case: Standards Standard Base Case Standard Investment Average Cost tothe Dealer/Distributor Level INPV INPV (millions) Electric Gas Oil Weighted (millions) (millions) Average 1 $ 295.29 $ 295.29 $ (7.84) $ 155.91 $ 166.82 $ 174.64 $ 161.94 2 -- $ 295.29 $ 295.29 $ (59.65) $ 164.76 $ 184.25 $ 186.69 $ 175.64 3 --- $ 295.29 $ 295.29 $(145.80) $ 189.29 $ 201.05 $ 200.81 $ 195.94 4 $ 295.29 $ 295.29 $(266.32) 186.84 350.60 $ 241.85 $ 274.62



### Figure 5shows the relationship between the average cost to the dealer/distributor and the level ofinvestments. It shows the average increase in cost tothe dealer/distributor required to support the level ofinvestments needed tomeet eachtrial standard level.

21Figure 5: Business Scenario 1: Relationship of Cost tothe Dealer/Distributor to Investments $400.00 -:.-s;--. $350.00 $300.00 -J )/ $300.00 7': $200.00

- ,I

- $250.00 $2000.00 ; ($10 °°)it 11 g n | F; $150.00 

### $0.00 $100.00 , ($200.00) $0.00 

### ~~~~($300.~00) ~ ($50.00) ($400.00) ($100.00) Trial Standard Level Bi Standards I Cumulative -- Standards Price -X- Current Price -A- Cumulative Price 

### Next, we analyzed the impact on the water heater manufacturers assuming they are unable torecover theirinvestments. This can be characterized as an absolute worst case, as it is expected the manufacturers willbe able to recover some ofthe fixed costs. The value ofthe industry drops by 36% forjust level one, due primarily tothe manufacturers not being able to recover the costs associated withnew blowing agents and flammable vapor design. For Business Scenario 2, the difference between the impacts ofstandards vs. the cumulative impact shows what alarge potential impact flammable vapor and the HCFC phase-out will have onthe industry. The investments are notpresented in Table 19 and Table 20, in orderto showthe change inINPV, and since the level ofinvestments do not change for each business scenario. Table 19: Business Scenario 2Results Regulatory Case: Cumulative Standard Base Case Cumulative Change in Average Costtothe Dealer/Distributor Level INPV INPV Value Electric Gas Oil Total (millions) (millions) 1 $ 295.29 $ 183.34 -38% $168.58 $190.34 $179.36 $180.46 2 $ 295.29 $ 129.61 -56%$ 176.48 $206.82 $190.77-$ 193.33 3 $ 295.29 $ 41.68 -86% $199.14 $222.24 $203.43 $212.15 4 - $ 295.29 $ (73.51) -125% - $197.34 $366.80 $243.68 $288.14 Regulatory Case: Standards Standard Base Case Standard Change in Average Costto the Dealer/Distributor Level INPV INPV Value ta (millions) (millions) Electric Gas Oil Total 1 $ 295.29 $ 287.45 -3% $ 155.71 $ 166.72 $ 174.51 $ 161.79 2 $ 295.29 $ 235.64 -20% $ 163.79 $ 183.00 $ 185.69 $ 174.52 3 $ 295.29 $ 149.49 -49% $ 186.42 $ 198.39 $ 198.64 $ 193.20 4 $ 295.29 $ 28.97 -90% $ 185.20 $ 342.61 $ 238.78 $ 269.57

22

### Figure 6 shows the relationship between the average cost tothe dealer/distributor and the level ofinvestments. These results depict what could be expected in aworst case scenario, i.e. loss ofall investments, so cost tothe dealer/distributor isbased on the markup thatresults inthe loss ofthese funds. Figure 6: BusinessScenario 2: Relationship ofCosttothe Dealer/Distributor to Investments

$400.00 $350.00 

### $300.00 $300.00 $ $200.00 ' $200.00 2q '.--Z $1oo~~~~~oo 

### ~~$200.00 E $100 .. 

## $15o.oo

CEis~~~~oaool~~~ 5$100.00 = E ($100.00) $50.00 S ($20 00.00 ($300.00)

- 

### ~i~~~($50.00) < ($400.00) ($100.00) Trial Standard Level 

### Standards I Cumulative Standards Price Current Price -- Cumulative Price 

### During the interviews, manufacturers commented on what they expected to be ableto recover interms ofthe fixed costs associated with each standard level. Some manufacturers felt they would be able to mark-up fully any incremental costs associated with a standard, while others felt theywould notbe able to fullyrecover the investments, due to pricing pressures in the market. Based onthese comments, ADL developed an analysis thatrepresents the increased costs associated withthe new regulations andthe expected impacts onmanufacturers, as well as the expected cost tothe dealer/distributor needed to meet these expectations. Theresults for Business Scenario 3are shown in Table 20 and Figure 7.

23Table 20: Business Scenario 3 Results Regulatory Case: Cumulative Standard Base Case Standard Change in Average Cost to the DealerlDistributor Level INPV INPV Value (millions) (millions) Electric Gas Oil Weighted $ 295.29 $ 267.30 -9.5% $169.91 $192.14 179.99 $182.04 2 $ 295.29 $ 253.87 -14.0% $178.27 $209.61 $192.11 $195.68 3 $ 295.29 $ 231.89 -21.5% $202.42 $226.06 $205.61 $215.74 4 $ 295.29 $ 203.09 -31.2% $199.28 $374.90 $246.61 $293.38 Regulatory Case: Standards Standard Base Case Standard Change in Average Cost to the DealerlDistributor Level INPV INPV Value (millions) (millions) __Electric Gas Oil Weighted 1 $ 295.29 $ 293.33 -0.7% $ 155.86 $ 166.79 $ 174.61 $ 161.90 2 $ 295.29 $ 280.38 -5.1% $ 164.52 $ 183.94 $ 186.44 $ 175.36 3 $ 295.29 $ 258.84 -12.3% $ 188.57 $ 200.38 $ 200.27 $ 195.26 4 $ 295.29 $ 228.71 -22.5% $ 186.43 $ 348.60 $ 241.09 $ 273.36 Figure 7: Business Scenario 3: Relationshipof Cost to the Dealer/Distributor to Investments
$400.00 $350.00 $300.00 -ii!~ $300.00

or $200.00

- -/ .. $250.00

· _ $200.00 ' $ 0$200.00 (»P/~I~?~' $150.00 A $0.00 $100.00 E ($100.00) $50.00 = ($200.00) $0.00 ($300.00) ,:ii, ($50.00) ($400.00) ~:~ ($100.00) Trial Standard Level Standards I Cumulative -- Standards Price

-- Current Price )t Cumulative Price


### Business Scenario 3represents the most likely scenario asto the impact on manufacturers. From all scenarios analyzed, flammable vapor ignition prevention and new blowing agent investments have a greater financial impactthan the energy efficiency investments needed to meettrial standard levels one ortwo. However,the investments needed tomeet trial standard levels three or four are greater thanthe investments required to meet flammable vapor ignition prevention and the newblowing agents. The combined costs oftrial standard levelsthree or four, flammable vapor ignition prevention and new blowing agents are significant and may potentially reduce industry value by 22 to 31 percent.

242.3.6.1. Short-termCash Flows 

### The GRIM spreadsheet calculates cash flows year-by-year and hence can be used to assess short-term impacts. Short-term cash flow impacts can help quantify the impact ofa standard on capital investments and costs inyears preceding the standard, and therefore provide valuable insights intothe industry's ability to meetthe standard. Short-term negative cash flows canhave negative business consequences. Due to the reduced availability ofinternally generated cash flows, manufacturers may find itnecessary to increase borrowing thereby adding to financial leverage. Diminished free cash flow may also make it difficultto meet obligations tocurrent and new debt holders and/orpayment ofdividends to shareholders. ADLhas quantified short-term impactsby summarizing the cash flow impacts on manufacturers inthe fewyears proceeding and following the standard. Table 21 through 23 show the short-term cash flows for each business scenario. Table 21: Business Scenario 1

Scenario Years P St d ar Years Preceding Standard Standards Fol 

### Standard Standard 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66 Std. Level 1 -8.2 -17.4 -22.1 -7.4 32.6 16.8 17.6 17.9 13.3 22.6 Std. Level2 -19.3 -33.1 -40.0 -23.2 37.6 6.1 2.6 0.7 -2.4 27.5 Std. Level3 -42.6 -65.7 -77.3 -44.0 47.1 -16.7 -29.4 -35.8 -23.1 36.7 Std. Level4 -70.4 -104.6 -121.8 -142.9 63.7 -45.8 -70.2 -82.4 -122.2 53.8 Table 22: Business Scenario 2

Scenario Years P St d ar Years Preceding Standard Years Following 

## receing aar Standard___

_ _____ Standard 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66 Std. Level 1 -8.2 -17.4 -22.1 -15.5 21.2 16.8 17.6 17.9 12.7 21.8 Std. Level2 -19.3 -33.1 -40.0 -35.2 20.8 6.1 2.6 0.7 -6.7 21.4 Std. Level3 -42.6 -65.7 -77.3 -62.4 21.3 -16.7 -29.4 -35.8 -33.6 21.9 Std. Level 4 -70.4 -104.6 -121.8 -169.7 26.0 -45.8 -70.2 -82.4 -141.6 26.6

25Table 23: Business Scenario 3 Years Following Years Following Scenario YearsPreceding Standard YasFloig Years Preceding Standard Y s Standard Standard 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Base Case 18.24 19.52 20.09 20.39 21.66 18.24 19.52 20.09 20.39 21.66 Std. Level 1 -8.2 -17.4 -22.1 -9.5 29.8 16.8 17.6 17.9 13.2 22.4 Std. Level 2 -19.3 -33.1 -40.0 -26.2 33.4 6.1 2.6 0.7 -3.5 25.9 Std. Level 3 -42.6 -65.7 -77.3 -48.6 40.6 -16.7 -29.4 -35.8 -25.7 33.0 Std. Level4 -70.4 -104.6 -121.8 -149.6 54.3 -45.8 -70.2 -82.4 -127.1 47.0 

### Since Business Scenario 3is the mostlikely outcome, the results from Table 23 were plotted in Figure 8. Figure 8: Short Term Cash Flows forBusiness Scenario 3 100 . --- 100
50 50

o

[+ Base Case + Standards, TS 1 || Base Case Cumulative, TS 1| -150 -150

20) -200 - -4 Base Case --- Standards, TS 1 -4 Base Case -- Cumulative, TS 1 -+-Standards, TS2 -Standards, TS 3 

## 1 ^ Cumulative, TS 2 ---- Cumulative, TS 3

- Standards, TS 4 -1( Cumulative, TS 4 

### As displayed inFigure 8,the short-term financial impacts for the standard case are pronounced for trial standard levels three and four. When cumulative effects aretaken into account, it is clear thatthe manufacturers may have an adverse impactin the shortterm, regardless ofthe trial standard level. This could lead to one ofthree outcomes: 1. Manufacturers may lose the level offunds in those years as shown inthe above charts. 2. Manufacturers, inthe short-term, may try to raise costs to the dealer/distributor to recover their increased costs. This could leadto increased costto the consumer. However, overthe long time frame, due to the competitive nature ofthe water heater industry, prices may decline to levels similar tothose presented inBusiness Case 3. 3. Manufacturers could raise the cost tothe dealer/distributor for current products to offsetthe negative cash flows inthe yearspreceding the standard. This could potentially increase the cost tothe dealer/distributor ofthe current baseline water

26

### heater by as much as 12% (the amount ofrevenue needed to offset the level four loss inthe year previous tothe standard taking effect), which could bepassed onto consumers. 2.4. Impacts on Manufacturing Capacity, Plant Closures and Loss ofCapital Assets 

### One ofthe potential outcomes ofnew standards can be the forced retirement ofexisting manufacturing assets, including tooling and investment. The Manufacturer Interview Guideused a series ofquestions toidentify impacts on manufacturing capacity. These questions were developed tounderstand the impact ofa standard on: * U.S. and North American manufacturing capacity

· Capacity utilization andplant location decisions in the U.S. and North America both with andwithout standards * The ability ofmanufacturers toupgrade orremodel existing facilities to accommodate anew product mix * The nature and value ofstranded assets, ifany In general, manufacturers expect tomeet future demand and expect little impact on manufacturing capacity as long as trial standard levels three and four, potentially requiring side-arm gaswater heaters and plastic tank electric units, are not mandated. Currently, the US industry has far more manufacturing capacity than the domestic market can absorb. Manufacturers estimated the industry is operating at anywhere from 60 to 80 percent oftotal capacity. Table 24 below summarizes the manufacturer's comments. Table 24: Im acts on Ca acit 1 Noexpected major impact on capacity. While increased cavity sizes will initially increase scrap rates due to foaming errors, manufacturers expect to meet the challenge. 2 Noexpected major impact on capacity beyond the issuesdiscussed intrial standard level one. 3 Plastictank electric units require amanufacturing process thatobsoletes current electric water heater manufacturing lines.The required capital investments to convert existing orbuild newfacilitiesare expected to cause some manufactures to ceasethe production of electricwater heaters. 4 Side arm gas water heaters would require large investments and reduce manufacturing capacity. Manufacturers expressed concern that foreign competitors who already mass-produce such heaters would gainaccess to the US marketand displace domestic producers. Side-arm water heaters are no longer manufactured in the US because of low demand. 

### Due tothe phase-out ofthe HCFC-141b insulation blowing agent and for flammable vapor ignition resistant design, regardless ofwhat efficiency standard is chosen, it is likely nearly every product line would haveto be redesigned, re-certified, and launched for sale in the US. One manufacturer claimed itwould take them two years tore-tool, which would give themanufacturer ayear tofinalize designs before the new standards go into effect. Several manufacturers indicated a preference to re-tool for new foaming agents, proposed energy-efficiency standards and flammable vapor-resistant designs at the same time, to avoid any redundant efforts and limitcosts.

272.5. Employment Impacts Assessment 

### In orderto assess employment impacts due to a standard, the Manufacturer Interview Guidewas used to explore current trends inproduction employment and solicit manufacturer views on changes in employment patterns resulting from new energy efficiency standards. The employment impacts section ofthe interview guide was used to understand: * Current employment levels associated with manufacturing at each production facility * Expected future employment levelsboth with and without a standard * Differences inworkforce skills, and issues related to retraining ofemployees The impact ofHCFC-141b foaming agent phase-out and flammable vapor resistant gas water heaters on employment levels was considered minimal by all interviewed manufacturers. However, all interviewed manufacturers indicated a transition to plastic tanks for electric water heaters would result in domesticjob losses. A transition to sidearm water heaters could also result in domesticjob losses. Absent standards, total employment inthe industry will be a function oflabor productivity and market growth.No revolutionary technologies have recently emerged to challenge the current manufacturing processes andrelated employment levels. Foreign competition is not expected to be athreat to commodity water heater manufacturing operations. Manufacturers expect to transition to waterbased foaming agents withoutjob losses. The industry-wide voluntary adoption offlammable-vapor resistant gas water heaters is notexpected to change employment levels either. Asthe manufacturing processes for gas and electric storage water heaters are largely the same, three factors will influence overall water heater employment inthe United States: 1) Switching to other waterheating technologies. Unless the costofswitching to alternative water heating technologies becomes attractive, consumers are expected to replace theirwater heaters with like models. 2) Competition from abroad: Due to high shipping costs and the low overall labor costin water heaters, there is little incentive to compete from abroad. Higher efficiency standards will further increase cavity sizesand thus shipping costs. But any large increases inlabor content would prompt at least one manufacturer to shiftmore production abroad. 3) Productivity and market growth: The vastmajority ofnew homes are expected to employ low-cost storage water heaters. The overall market growth of2.5% peryear and modest productivity gains ensure current employment levels for the foreseeable future. The steady andpredictable replacement market ensures future demand. As stated earlier, the impact ofnew foaming technologies and flammable vapor resistant designs on labor is expected to beminimal. Unless efficiency levels requiring the adoption ofside arm heaters or plastic tanks is mandated, manufacturers do not anticipate significant changes in employment levels or training requirements. The impacts on employment are summarized below in Table 25.

28Table 25: Impacts on Emplo ment Levels 1 No expected major impacton employment levels 2 No expected major impact onemployment levels 3 Plastictank electric units require a manufacturing process that obsoletes current electric water heater manufacturing lines. This could potentially lead to some manufacturers abandoning the electricwater heater market. While some of the employment would shiftto manufacture natural gaswater heaters, this would reduce employment levels substantially. 4 Side arm gas water heaterswould require large investments and reduce manufacturing capacity. This reduction in capacitywould also beaccompanied with a reduction in employment levels. 2.6. Impact on Small Manufacturers 

### The remaining small manufacturers ofwater heaters in the United States concentrate on niche products such as electric only, solar, oil-fired, indirect, or marine systems, etc. Depending onthe company, more or less oftheproduct line will be affected by the proposed rulemaking. Small manufacturers use avariety ofinsulating and lining materials, which include stone, fiberglass, and a variety offoams. Atleast one domestic producer already uses waterblown foam intheir waterheaters. As efficiency is astrong selling point for these manufacturers, investments will be required ifmanufacturers decide to significantly surpass standard levels. However, any required re-tooling would be amortized across a much smaller volume than that ofalarger competitor. Therefore, it may potentially have a larger impact. The low volumes inthese niche markets necessitate somewhat different manufacturing processes than the ones usedby larger commodity producers. Consequently, these manufacturers will be impacted differently thanthe commodity producers. It is expected small manufacturer's material and labor costswill increase more compared to their larger competitors because ofsupplier discounts and production efficiencies. Flammable vapors resistanttechnology is agood example ofthistrend. Table 26 belowdescribes the expected impact on small manufacturers. Table 26: Impact on Small Manufacturers ___1 ____No expected major impact beyond whatwill beseen bythe rest oftheindustry 2 As many small manufacturers use increased efficiency asa selling point, movement ofthestandard to leveltwo, and more so with the higher efficiency trial standards levels, may eliminate themarket differentiationthe small niche manufacturers have. This could potentially reduce sales dramatically and force them out of business. 3 Plastictank electricwater heaters are probably impossible to achieveforsmall competitors unless licensing feesand market conditions arevery favorable. Thus, any efficiencystandard level requiring technology use will most likely causesmall manufacturers to abandon the electric market affected by the rulemaking. 4 Sidearm gas water heaters would require large investments and may alsoprompt small manufacturers to leave that segment ofthe residential market. 2.7. Competitive Impacts Assessment 

### Analyzing the expected financial impacts ofnew standards onmanufacturers is only one aspect ofthe Manufacturing Impact Analysis. Impacts on consumers from any shiftin market power tomanufacturers are also assessed. In fact, EPCA directs the Department

29

### to consider any lessening ofcompetition likely to result from new standards. It further directs the Attorney General to determine the impact, ifany, ofany lessening in competition. In assessing potential competitive effects, the Department will draw on the experience and assistance ofthe Department ofJustice. Changes inindustry concentration-the distribution ofmarket share among manufacturers-can signal potential reductions in competition. Under reduced competition, firms are better ableto use their market power to increase profits. Firms may exert market power by raising pricesorreducing quality, service, and other aspects ofthe product thatconsumers value. The water heater industry is afiercely competitive market. Several manufacturers indicated the fiercely competitive market might lead toa market exit ofone or more manufacturers. Manufacturers also stated the array of regulations facing water heater manufacturers could speed up any market exit. 2.7.1. Global Competition 

### Global competition currently has little impact on the overall US water heater industry. One multinational manufacturer statedthat large increases inlabor costs would prompt themto shift more production abroad. Some purchased parts used inwater heaters, such as gas controls, are already manufactured outside theUnited States. The long-term trend tomanufacture labor-intensive components in low-labor cost areas is largely independent ofany energy efficiency standard. However, themajority ofparts in water heaters are still purchased locally. Table 27: Effect on Global Competition _______I No additional expected major impact 2 No additional expected major impact 3 No additionalexpected major impact 

### ~~~~~4 ~Side-arm gas water heaters are no longer manufactured inthe United States. Thus, any energy efficiencystandard needing side-arm water heaters to meet itcould effect market entry offoreign manufacturers who already mass-produce such heaters. 

### Several manufacturers have made international investments or acquisitions inthe water heater industry. This trend is also assumed tobe independent ofproposed standards. 2.8. Other Comments 2.8.1. Manufacturer's Comments on Consumer Utility 

### All interviewed manufacturers expressed concern about the lossofutility to consumers thathave water heaters located insmall spaces. Many residential water heaters are certified for zero-clearance and are installed that way; especially in mobile homes, crawl spaces, attics, and manufactured housing. Manufacturers made the following comments on the location ofawater heater and the effects ofenergy efficiency standards onwater heater size. They indicated that ifa water heater is installed in a small space, any added insulation might prevent simple replacement. Instead, a consumer maybe forced to potentially accept aunit with a smaller storage tank, removing the door or altering the space, orbuying and installing

30

### multiple units. All ofthe proposed trial standard levels (except for oil trial standard level one), coupled with the use ofnewblowing agents, will increase the size ofwaterheaters. According to one manufacturer, halfofall installations would be impacted by achange in height or width ofthe water heater. Several manufacturers indicated they might discontinue low demand or models designed for small spaces when new energy efficiency standards go into effect.

31

### Attachment A: First Manufacturer Questionnaire Attachment B: Manufacturer Interview Guide Attachment C: Original Financial Inputs Attachment D: GRIM Operating Principles Attachment E: Cash Flow Results

32ATTACHMENT A Interview Guide from 1996/1997 Stakeholder Interviews
Background The July 1996 Process Rule established procedures, interpretations andpolicies toguide the Department intheconsideration ofnew orrevised appliance efficiency standards. Key elements of this rulewhich have a direct bearing onthe conduct ofany future analyses include: 1. Providing opportunities forpublic input early in therulemaking process. 2. Developing qualitative and quantitative estimates ofcritical variables from multiple sources with inputs from interested parties. 3. Understanding and reporting the distribution ofcosts andbenefits ofstandards on different manufacturers. 4. Considering the impacts ofstandards onexisting domestic manufacturing facilities including capital investments and employment levels. 5. Utilizing an annual cash flow approach to determine quantitative impacts on manufacturers.
Introduction The July 1996 Process Rule describes the approach DOE will use inthe engineering, consumer, andmanufacturer analyses. The process provides for consultation with interested parties before initiating a detailed analysis. Thepurpose ofthis interview was to help identify issues,gather information and identify additional sources ofinformation that could help assess the likely impactofstandards. This is only one ofseveral opportunities that stakeholders in the water heater rulemaking process will have to contribute information. Questions 1) There is an Environmental Protection Agency requirement tophase out manufacture and importofHCFC blowing agents currently used forfoam insulation by January 1,2003. What are yourplans for a replacement blowing agent? How will this affect yourproducts and manufacturing line? 2) TheConsumer Product Safety Commission (CPSC) has been working with industrytoward developing a voluntary standard to address gas-fired water heater ignition offlammable vapors. The CPSC expects atest method (standard) incorporating vapor ignition protection to be sent totheAmerican National Standards Institute (ANSI) in 1999 forapproval as a national standard. What are your plans formanufacturing gas-fired water heaters that will resist flammable vapor ignition? How willthis affect your products andmanufacturing line? 3) The Department is concerned that increasing fuel-fired water heater recovery efficiencies to high levels may cause health and safety problems with existing venting systems. At what recovery efficiency levels doyou provide special instructions that gobeyond theCategory I NFGC venting guidelines? 4) Additionally, theDepartment is aware ofthree alternative venting systems, direct venting, induced draft and induced draft with flue gas dilution, which may reduce installation costs and could be usedto avoid safety problems athigher recovery efficiencies. What dothese options costto manufacture and install? In what installation situations arethese systems feasible?5) Inorder to runthe simulation models WATSIM andTANK forthe engineering analysis, the Department will need information about the geometry ofthe baseline models. These parameters are mostlydimensions, such as, tank height, tank diameter, tankwall thickness, dome height, insulation thickness, thermostat location, etc. What are yourrecommendations for:

e Tank height: * Tank diameter: * Tank wall thickness: * Insulation thickness: * Thermostat location:6) Forpurposes ofthis analysis assume a fiveyear regulatory life (i.e., amortize this cost over fiveyears). Do you agree with this assumption? 7) TheEnergy Information Agency (EIA) energy price forecasts donot consider the possible impacts ofutility restructuring. This may differ from other forecasts. Forexample, the Gas Research Institute (GRI) has a future price scenario showing 29% lower electricity prices by 2015. DOE will use the most recent EIA electricity/gas price forecast in the engineering and life-cycle cost analysis. For thepurpose ofcalculating national benefits the Department will perform life-cycle-cost sensitivity analyses at -12.5% and -25% ofthe EIA forecast for electricity prices. In an additional sensitivity analysis,the Department will determine therate ofdecrease in electricity/gas price needed to reduce netpresent value ofthe reduced life-cyclecostto zero. Do you agree with this approach? Do you have any suggestions foran alternative fuel priceprojection forthe 30year period? 8) In addition to what we have previously discussed, what changes have occurred in the water heater industry in recent years, andhow have these changes impacted your company?Attachment B Water Heater Manufacturers Interview Guide



### Introduction The Department proposes to conduct interviews with manufacturer representatives to gather key information on the effects thatpotential new energy efficiency standards for water heaters might have on their company's revenues and finances, and on their workforce. This interview guide provides a starting point to identify relevant issues and qualitatively and quantitatively describe the impacts ofpossible candidate standards levels.

PartA: CurrentOrganizational Characteristics The Department's interest concerning manufacturer impact is focused atthe plant or profit center level directly pertinent to waterheaterproduction. Thecontext within which the plant operates and the details ofplantproduction and costs are not readily available from the published literature, however, sothe Department invites the manufacturers toprovide these details confidentially intheir own words tothe extent practical. The organizational setting around thewater heaterprofit center is ofinterest to round outthe Department's understanding ofthe probable future ofthe water heater manufacturing activity without and with energy efficiency standards. A.1 Identify names ofparent companies and any subsidiaries relevant to the water heater industry. A.2 Please providethe locations ofyour water heater production facilities and the product mix manufactured there. A.2.1 How would energy efficiency standards affect each production facility mix? A.3 How has your company incorporated energy efficiency improvements in water heatertechnology into its product line and marketing strategy? A.4 How would anew energy efficiency standard on water heaters affect yourproduct mix and marketing strategy? PartB: IndustryInfrastructure As part ofan attempt to better understand the industry infrastructure and the impact energy efficiency standards might have on it,the Department would like for manufacturer representatives to discusstheir major distribution channels and major sources ofsupply. Major Customer Types

### The following questions are intended to gainan understanding ofhowpotential energy standards levels might affect customer mix and distribution channels. B. 1. Generally how would anew water heater standard impact your customer mix, distributionchannels and corresponding profitmargins? B.2. Doyou see any changes in emphasis on domestic sales channels, and would the presence ofnew energy efficiency standards have an impacton production ofwater heaters for sale? MajorSuppliers The Department recognizes thatmanufacturers donot operate in insolation and that changes inproduction levels or economic health ofamanufacturer can have significant impacts onits suppliers and othertrade allies. The Department plansto be available to meet withrepresentatives ofthese trade allies and to consider their impacts. B.3. Who are the suppliers that may be affected by changes inyour productmix as a result ofstandards? Howmight they be affected?

PartC: ManufacturerCash Flow Analysis Each manufacturer has been given the Government Regulatory Impact Model (GRIM) to develop its own cash flow model to compare with that ofthe "industry" cash flow. This will allow each manufacturer to use its ownfinancial information to arrive at the expected differences in cash flow due to new energy efficiency standards. These results, together with an adequate understanding ofhowthey were developed, willhelp the Department to estimate industry impacts for different types ofmanufacturers. 

### C.1. Costs How do youexplain differences, ifany, between your manufacturing costs with and without new energy efficiency standards and those presented inthe sample results for the industry as a whole? C.1.1. Is the "Industry" cost structure (materials, labor, overhead, tooling, etc.) representative ofyourfirm's costs? What are the differences and their causes? C.1.2. How might new standards alter this cost structure? C.2 Prices How do you explain differences, ifany, between your expected productprices with and without new energy efficiency standards and those presented inthe sample results for the industry as a whole?

### C.2. 1. Are your gross margins (% revenue) different post standards? Ifso, what arethe causes? C.3 Shipments How do you explain differences, ifany, between your expected product shipments with and without new energy efficiency standards? C.3.1. What assumption(s) did you make aboutyour firm's market share poststandards? What was your reasoning? C.3.2 Isyour product mix significantly different from the overall industry proportions? C.4 Financial How do you explain differences, ifany, between your financial data and those presented for the industry as a whole? C.5 Impacts onthe Business Please discuss your interpretations ofthe cash flow analyses results for the standards cases. Whatdo the results imply aboutthe future ofthe business? Availability ofcapital? Are there additional financial impacts on new standards that are not being captured in the cash flow analysis? Please explain? (i.e., TaxRate, Discount Rate, Working Capital, SG&A, R&D, Depreciation) C.6 Additional Economic Measures Please discuss any additional measures, ifany, thatyoumight have developed that provide insight into the economic effects ofchanges in energy-efficiency standards. PartD: Competitive ImpactsAssessment Competitive impacts are assessed mainly interms ofmarket power, which is defined as the ability to set agiven product price within a limited range. The Department is interested inmanufacturer viewpoints on the extent to which new energy efficiency standards wouldincrease market power and thereby lesson competition within the water heater industry. D.1. How would new energy efficiency standards affect your ability to compete in the marketplace? D.2. Doyou believe that new energy efficiency standards would unfairly assist orharm the ability ofsome firms inthe industry to compete? D.3. Please discuss examples, ifany, wherein substantial consumer subgroups would experience economic orperformance penalties as a result ofnew standards. D.4. Canyour firm meetpotential efficiency levels without changing yourproducts in waysthat consumers might care about?

### D.5. Does your company have specific information forthe Department on consumer preferences for product attributes potentially affected by new standards? PartE: Employment Impacts Assessment The impact ofnew energy efficiency standards on employment is animportant consideration in the rulemaking process. This section ofthe interview guide seeks to explore current trends inwater heaterproduction employment and solicit manufacturer views on how domestic employment patterns might be affected by new energy efficiency standards. E. 1. How would your employment levels change under new energy efficiency standards? E.2. Wouldthe workforce skillsrequired under new energy efficiency standards be different enough torequire extensive retraining orreplacement ofemployees? PartF: Manufacturing Capacity Impacts Assessment The information discussed here is important for developing an understanding ofthe investment costinputs to GRIM. F.1. Howwould the imposition ofnew energy efficiency standards affect your capacity utilization and manufacturing assets levels at your domestic production facilities? F.1.1 Would any facilities be closed or downsized? F.1.2. Would any facilities be added or upgraded? F.2. Ifcurrent capacity were to be made obsolete, would itbe remodeled to accommodate anewproduct mix? F.3. Please estimate the value ofstranded assets resulting from anew standard, and/or the costs ofrefitting the facility and carrying out the research, engineering, and other supporting activities required to accommodate thenewproduct mix.Attachment C Financial Inputs for "Strawman" Water Heater Manufacturer forthe GRIM 

### Abstract: Thefollowingtableillustratesarepresentative financialstructureto be used forconductingthe cashflowanalysisof a "strawman"waterheatermanufacturer. This datawaschangedinthe finalanalysisto representcomments receivedduringthe interviewprocess. Assumptions for WaterHeaters Scenario Description WaeriHeateis; 

### ,':: Base Year 1998Beginningyearfor analyticalpurposes Announcement Year 2000 Yearin which theregulation announcementismade Standard Year 2003 Yearin which the regulationtakes effect Tax Rate 35.8% Discount Rate forNPV 7.88% Inflation Rate perannum Working Capital 12.91% ofRevenue Standard SG&A 11.06% ofRevenue Research and Development _2.1%lofRevenue Ordinary Depreciation 3.09% ofRevenue Ordinary CapitalExpenditures -3.71% ofRevenue Financial InputstoGRIM forthe Water Heater Rulemaking Analysis Introduction 

### The Department ofEnergy proposes to use the Government Regulatory Impact Model (GRIM) to calculate the financial impacts ofnew standards onmanufacturers ofwater heaters. Given the relatively small number offirms inthe industry, the Department proposes to create anindustry cash flow analysis using a bottom-up approach. Essentially each manufacturer would provide its owncash flow analysis to be aggregated withall other manufacturer submittals. In order to facilitate individual manufacturer analysis, the Department will prepare baseline scenarios for a strawman manufacturer using publicly available financial information. The objective ofthis document is to outline and document the basis offinancial assumptions to beused in GRIM when performing the cashflow analyses for a strawman water heater manufacturer. Manufacturers will be able to modify relevant parameters to meettheir own situation (price, cost, financial parameters, shipments, etc.).

### GRIM Model The GRIM model is used to conduct a standard annual cash flow analysis thatuses price, quantity, and cost information to assess the impact ofregulatory conditions on manufacturer income and cash flow. This process is represented in Figure C-1.

___ Price

_ D < Manufacturing Costs
Quantity - Financial Information

Cash Flow Figure C-1. Using GRIMto perform an industrycash flowanalysis 

### Financial Inputsto GRIM Prior toinitiating the cash-flow analysis, financial data on variables such astax rate, working capital, depreciation, cost ofcapital, etc., needto be inputinto GRIM. To obtain estimates forthese inputs DOE has analyzed information available from publicly available sources offirm-specific financial information formajor water heater manufacturers-SEC-1 OK Reports, Dun and Bradstreet Company Data Reports, and Standard & Poor's (S&P) Stock Reports and Value Line Reports. Water heatermanufacturers are not ahomogeneous group. However, for the purpose of the GRIM cash flow analysis, only the waterheater segment ofeach firm's operations is considered. Thus financial information relevant to the GRIM analysis should be representative ofplant level statistics to the extent possible. Where firm specific data are tobe used these should be drawn only from firms with a substantial portion oftheir operations concentrated inwater heater manufacturing. Value Line and Standard and Poor's (S&P) composite industry statistics forthe home appliance industry were reviewed. Value Line's statistics for thehome appliance industry are a composite ofthe following companies: Whirlpool, Maytag, Fedders Corp., Black and Decker, Toro and National Presto Industries. In S&P reports, appliance manufacturers are included in the "Household Furnishings and Appliance" industry. The S&P statistics are a composite ofthe following companies: Armstrong World,Basset Furniture, Fedders Corp., Maytag, Mohasco, Roper, Rubbermaid, Whirlpool, White Consolidated Industries and ZenithElectronics. Giventhe composition ofthe industry composites, water heater manufacturer specific financial information was given greater weight.

### The tables in the following sub-sections present historical financial data obtained from the sources previously described. Tax Rate 

### Firms pay an annual tax, levied by the federal and state governments, based onincome. Taxable income and the income taxes paid arepresented as separate line items in a company's income statement. Table C-1 presents the effective income tax rates for one water heater manufacturer over the period 1995-1997. This information was obtained fromthe manufacturers' income statements, by dividing the income taxes paid by the taxable income. The marginal tax rates paid by diversified manufacturers for their water heater operations is difficult to estimate and may or may notbe reflected by the "effective" tax rate on financial reports. The tax rate for the industry composite, as reported by Value Line is higherthan for the manufacturer. Table C-1. Average incometax rates



### : Manufactuirer:"' : Avg. Taxl li :: 

### Year A 35.8% 1995-1997 Value Line 40.0% 1990-1996 The Department proposes using anincome tax rate of35.8% as an inputto GRIM. This value is based onthe manufacturer average tax rate. Working Capital 

### Working capital is defined as the difference between afirm's short-term (or current) assets and short-term (or current) liabilities. It isthe part ofa company's capital that must be maintained in orderto under take day-to-day operations ofthe company without experiencing liquidity problems. Because cash inflows and outflows are not synchronized, a firm needs to maintain access to cash either from its own liquidity portfolio, or fromback-up liquidity. This capital cannot be used in the investing activities ofthe company. Table C-2 presents average working capital maintained by amajor water heater manufacturer as apercentage ofits annual revenues over the period 1996-1997. Working capital is also presented for the home appliance industry composite as reported by Value Line. Working capital is calculated by subtracting current liabilities from current assets ofthe firm, where the current assets andliabilities are obtained from the firm's annual balance sheets.Table C-2. Average working capitalas a percentage ofrevenues

: 

### Manufacturer WorkingCapitalas 

### i: ' :Year : :.- , ;:;: :o :; ' ^: : :ofRhenes iii:Ei
. ::;' ' ' ';'-

_____________ 

## % ofRevenues:__________ A 28.3% 1997 A 12.91% 1996 

### Value Line 6.76% 1990-1996 Based on information available in Table C-2, the Department will assume working capital to be 12.91% ofrevenues for input into GRIM. In general, companies will strive to lower their working capital to the lowest amount possibleto free up asmuch cash flow as possible for revenue-generating investing activities. According to Standard & Poor's, inthe last few years improved workingcapital management techniques have greatly reduced the investment thathas traditionally been required. Selling, General and Administration (SG&A) 

### Table C-3 presents average SG&A expenses for amajor water heater manufacturer as a percentage ofits annual revenues. The data has been averaged over four years, 1994 through 1997. SG&A information is presented as a line item in individual manufacturers' income statements, presented in SEC 10-K reports. Table C-3. Average SG&A expense as a percentage of revenues Manufactrer SGAas 

### % ofIe.; '' 

### ' : 

### f

. . :: ,. .Revenues, .: .;: . H : i A 11.06 1991-1997 

### Selling costs include any expense or class ofexpense incurred in selling or marketing. In amanufacturing firm, selling costs include both marketing (order getting) costs and logistics (order-filling) costs. Marketing costs include market research, advertising, point-of-sale promotions, and salespersons' compensation andtravel costs. Logistics costs include warehousing and delivery costs aswell as record-keeping costs associated withprocessing anorder. General and Administrative (G&A) costs are expenses incurred for the general direction ofthe enterprise. G&A costs include the cost ofservice and staffunits (such as the personnel office) and general corporate costs, including compensation oftop management and donations to charitable organizations. The Department proposes using avalue 11.06% ofrevenues for SG&A expense as an input to GRIM. Research and Development (R&D) 

### Table C-4 presents the R&D costs incurred by a major water heater manufacturer as a percentage ofits annual revenues. The R&D cost data has been averaged over the past four years, 1991 through 1997.Table C4. Average R&D costs as a percentage ofrevenues 

### Manufacturer; ;Avg.R&D Cost

. :!: l

### : as % ofRevenues : Wv:
. ti;4 A L i (1991-1997) A 2.11 

### The separate disclosure ofresearch and development expense is arelatively recent requirement. Formerly, mostcompanies includedthis expense as apart ofgeneral and administrative expenses. Because the amount spent on research and development can provide an important clue as tohow energetic the company is inkeeping itsproducts and processes upto date, FederalAccounting Standards Board (FASB) requires thatthis amount be reported separately ifit is material. Based onthe information in Table C-4, theDepartment proposes using R&D expense as 2.11% ofrevenues for input into GRIM. Depreciation 

### Plant and manufacturing equipment assets have limited useful lives; that is,they will provide service tothe firmover a limitednumber offuture accounting periods. A fraction ofthe cost ofthese assets is therefore properly chargeable as expense in each of the accounting periods in which the assets provide service to the firm. The accounting process forthis gradual conversion ofplant and equipment capitalized costinto expense is called depreciation. Table C-5 presents average depreciation for amajor waterheater manufacturer as a percentage ofits annual revenues. The data has been averaged overeight years, 1990 through 1997. Depreciation ispresented as aseparate line item in the manufacturers' income statements aspresented in SEC 10-Kreports.Table C-5. Average depreciationexpense as a percentage ofrevenues. Maniufacturer Depreciation as i% '' .Year 

### * 

### an c 1 : 

### *of Revenuesj'i;^-X ;: 

### ; A 3.09 1991-1997 Value Line 3.66 1990-1996 

### Based on information in Table 5, the Department proposes using a value of3.09% of revenues for depreciation expense as an input into GRIM. Capital Expenditures 

### These are the expenditures made for additions to fixed assets, like plant, equipment, etc., intended to benefitfuture accounting periods (in contrast with other expenditures that benefit the current period). These expenditures are aimed at increasing the capacity, efficiency, life span, oreconomy ofthe operation ofan existing fixed asset, or, in some cases, tobuild entirely new assets. Table C-6 presents average capital expenditures for amajor water heater manufacturer as apercentage ofits annual revenues. The data has been averaged over eight years, 1991 through 1997. The table also presents data from the 1992 Census ofManufactures. Table C-6. Average capital expenditures as a percentage ofrevenues


### a t: Mfacnuaer;? ; : 

### :: V 

### CapitalExpenditures I, 'iYe'ar,';

· 

### 0:7:5 : I:}_}i> ; ; °as %of iRevenues:

- 

### t:

## it:: g ' i 

## ' A 3.71 1995-1997 Census ofManufactures 0.71 1992 

### The Department has no corresponding value for depreciation from the Census of Manufactures. Hence the Department proposes to use the capital expenditure information available from the 10-K financial reports ofManufacturer A. Based on information in Table C-6, the Department proposes using capital expenditures as 3.71% ofbase year revenues for input into GRIM. Costof Capital/Discount Rate 

### Cost ofcapital is ameasure ofa company's cost ofusing capital that itraises either through loans (i.e., debt) orby issuing equity. Itis the minimumrate ofreturnthatmust be earned onnew investments that will not dilutethe equity ofthe shareholders. This rate ofreturn is often referred to as the discountrate, hurdlerate, orthe opportunity cost ofcapital. The company cost ofcapital is aweighted average ofthe returns that investors expect from various debt and equity securities issuedby the firm. Itis calculated as the cost of debt capital (which isthen adjusted forthe income tax effect ofdebt financing) plus the cost ofequity capital, weighted by the relative amount ofeach in a company's capital structure. For thepurpose ofcharacterizing financial impacts ofregulations on manufacturers using GRIM, the Department proposes using the company cost ofcapital to discount future cash flows for arriving atthe waterheater industry value.

### In orderto calculate the company cost ofcapital, itis essential to identify acompany's costofraising debt, cost ofraising capital through issuing equity, andthe capital structure ofthe company. Capital structure ofacompany gives information aboutthe amount of debtversus the amount ofequity in the company. Cost ofdebt: Cost ofdebt is aweighted average cost ofdebt based on all forms ofdebt financing outstanding. Information on the amount ofdebt outstanding and the interest rate at which itwas issuedwas obtained from SEC 10-K financial statements and Moody's reports for a major publicly traded water heater manufacturer. Thewater heater manufacturer has aline ofcredit available from a group ofbanks. In addition the company can raise debt through offering corporate bonds. The company's corporate bonds havebeen rated by Moody's rating services. Debtratio is defined as the ratio oflong-term debt tototal long-term capital (i.e., longterm debt plus equity), and illustrates acompany's capital structure. Table C-7. Cost ofdebtand debt ratio 

### Manufacturer Debt Ratio CostofDebt 

### 1. : 997 

## , ; :::; :1997 : A 0.281 6.73% 

### Cost ofequity: Cost ofequity isthe rate ofreturnthat equity investors expect to earn on their investments in acompany's stock. These expectations are reflected in the market price ofthe company's stock. One way ofestimating the cost ofequity is by using the capital asset pricing model (CAPM). The CAPM is based onthe premise that the expected orthe required rate ofreturn on any firm's common stock equals the riskless rate ofinterest plus a premium forrisk. The CAPM is widely used by large corporations toestimate their costs ofequity.' Another method that could be used to determine the cost ofequity isthe historical rate ofreturn tothe stockholder. According to the CAPM, the cost ofequity, or, the expected return for equity, is determined as: cost ofequity = riskless rate+ beta * [riskpremium] where: riskless rateis usually the short-term Treasury bill rate, orthe long-term government bond rate adjusted for the riskpremium over Treasury bills, risk premiumis the difference between the expected return on the market portfolio and the riskless rate, and beta is ameasure ofthe sensitivity ofa company's stock tomarket movements. ' For more information on CAPM refer to Chapters 7, 8and 9 ofCorporate Financeby Brealey, R.A., and Myers, S.C.; and the article entitled DoesCapital AssetPricing Model Workby Mullins, D.W., published in the Harvard Business Review.

### Table C-8 presents yields on Treasury bills and government bonds, and the average risk premium associated withthese securities. Each portfolio offers different degrees ofrisk. Treasury bills are about as safe an investment as one can make. There is little risk of default, and their short maturity means that theprices ofTreasury bills arerelatively stable. However, investors cannot lock in areal rate ofreturn; there is still some uncertainty about inflation. By switching to long-term government bonds, investors acquire an asset whose prices fluctuate as interest rates vary. (Bond prices fall when interest rates rise andrise when interest rates fall.) An investor who switches from government bonds to common stocks has a direct share inthe risks ofthe enterprise, and hence accepts the additional default risk. Investors who accepted the extra risk of common stocks received, on average, apremium of8.5 % a year overthe returnon Treasury bills. Table C-8. Average rates ofreturn (1990-96) and riskpremiums (1926-94) on some securities (figures in percent per year) 

### 'Portfolio 1 

### :"!' li, '; :,: . 

### ; ,::Average Annual : Average Risk : : 

### ' ' = ; RateofReturn2 Premium 3 

### * 

## 0 ~i *It;: ' , i 

### (Nominal) (Extrareturn vs.. : X: E ;: 

### :. ~~ , 1 

### =? : :3EiiTreasury bills) := !'::

### : : : 5:? !!

### =

!!

### '^;! : i'=:=i:: :~ m



### ': :; (1990-96) X: 

### ' : : (1926-94) Treasury bills 5.00 0 Government bonds (10 yr.) 7.06 1.5 Common stocks (S&P 500 index) 8.5 Table C-9 presents average values ofbeta for a waterheater manufacturer. The datahas been averaged over the period 1990-97. The values ofbeta are obtained from financial services provided by the Dow Jones Company. They measure the sensitivity ofa stock's price to overall fluctuations inthe S&P 500 stock index. Beta measures the sensitivity of the return on an individual stock tothe return on themarket portfolio. A stock with a beta of 1tendsto move up and downthe same percentage as the market. Stocks witha beta coefficient lessthan 1tend to move in percentage terms lessthan the market. Similarly, a stock with abeta that is higherthan 1will tend tomove up anddown more than the market. Table C-9. Average Beta valuesforaWater Heater Manufacturer 

### iMan, ufactuiiTrer0i ;1

### ;;:: =;,; ;s'Betai:;

### . ! 

### N:: ~

### :(::

. : =: ~:(!99 : ! 97 A 0.84 Using CAPM to calculate the cost ofequity, the following results are obtained for the water heater manufacturer: Manufacturer A: Cost of equity= (7.06-1.5) + 0.84 * (8.5) = 12.7% 2Based on data fromthe Federal ReserveStatisticalRelease. 3Source: Ibbotson Associates, Inc., Stocks, Bonds,Bills,andInflation,1994 Yearbook

### [risklessrate] beta * [riskpremium] Adjusting for inflation (averaging 3.27% per year over theperiod 1990-97), the real cost ofequity forManufacturer A is 9.43%. Weighted Average Cost ofCapital(WACC) is defined as: WACC = (1-tax rate) *cost ofdebt * [debt/(debt+equity)] + cost ofequity * [equity/(debt+equity)] Manufacturer A: WACC = [(1-0.358) *6.73 *0.281 ]+ [9.43 * (1-0.281)] = 7.99% The weighted average cost ofcapital accounts for inflation, as real values ofcost of equity and debt are used inthe calculation. In calculating WACC it isassumed thatthe manufacturer maintains the same capital structure inthe future, i.e. future debtratios remain the same as inthe past (see Table C-7). Independent estimates ofthe WACC were obtained from Ibbotson Associates, a company thattracks the industry cost ofcapital forover 300 industries. Their analysis reports a WACC of 11.6% for the household appliance industry (represented by the SIC code 363) inthe year 1997. Adjusting for inflation (2.2% in 1997), the WACC net ofinflation wouldbe 9.4%. The Department proposes using a WACC of7.99% asthe real cost ofcapital for discounting future cash flows in GRIM, i.e. the discount rate forthe industry NPV.Attachment D GRIM Operating Principles (Tailored toconductWater Heater Manufacturers' Cash-Flow Analysis)
1.0 Introductionand purpose 

### The purpose ofthe Government Regulatory Impact Model (GRIM) isto help identify the effects ofvarious efficiency regulations and other regulations onmanufacturers. The basic mode ofanalysis is to determine the change in value ofthe manufacturers(s) following aregulation or a series ofregulations. The model structure also allows an analysis ofmultiple products withregulations taking effect over aperiod oftime, and of multiple regulations onthe same product. Industry value is defined, for the purposes ofthis analysis as the presentvalue ofcash flows forthe manufacturer(s) in question. Cash flow is calculated by the user entering shipment volumes and manufacturer prices (i.e., prices from manufacturers to the first customer, such as awholesaler) and then selecting user-defined regulatory levels. The model calculates the actual cash flowsby year and then determines the present value of those cash flows both without regulations (the pre-regulation base case) and with regulations (thepost-regulation standards case). Output comes from the model interms ofsummary statistics, graphs ofmajor variables, and, when appropriate, access to the complete cash flow calculation.
2.0 Model description 

### The basic structure ofthe GRIM is a standard annual cash flowanalysis which usesprice and volume information as an input, builds on fundamental base cost information, and accepts a setofregulatory conditions as changes incosts and investments. The cash flow analysis is separated into two major blocks: income and cash flow. The income calculation determines theprofit after taxes butbefore financial charges. The cash flow calculation converts profit after taxes into an annual cash flow by including investment andnon-cash items. Below are definitions oflisted items on theprintout ofthe output sheet. (see Section 3.0) (1) Income Statement: Overall calculation ofNetIncome Before Financing(17) using revenue and cost items subject to income tax effects as described in (2) through (17). (2) Price/Unit: Actual manufacturer unit price charged to the first level ofdistribution (distributor, etc.), entered as an input variable by user. (3) UnitSales: Annual shipments; entered as aninput variable by user.

### (4) Revenues: Annual revenues; computed by multiplying Price/Unit (2) by UnitSales(3). (5) BaseCosts: Costs per unitprior toregulations entered as input (Labor,Material,Overhead) variables by the user. (6) New Costs: Costs perunit following regulations; entered as (Labor,Material,Overhead) input variables bythe user. (7) Labor: Factory direct labor and fringe benefit costs; entered as an input variable by theuser. (8) Material: Purchased materials and components; entered as an input variable by the user. (9) Overhead: Factory overhead excluding depreciation; entered as aninput variable by the user. (10) Depreciation: Annual depreciation on pre-regulation assets; computed as apercentage ofRevenues (4). Annual depreciation on post-regulation assets is computed by dividing Capital Expenditures(24) by auseful lifefrom Major Assumptions. For post-regulation years, Depreciationisthe sum ofdepreciation on pre- and post-regulation assets. (11) CostofSales: Total cost ofsales, computed by addingLabor(7), Material(8), Overhead(9) andDepreciation(10). (12) R&D: Research and development costs unrelated to regulations; computed as a percentage ofRevenues (4). FromMajor Assumptions. (13) ProductConversion: Expensable costs related to meeting aregulation, often including product redesign costs and expensable factory conversion expenses. Also includes costs incurred for new product literature and catalogs, product obsolescence, and various related marketing expenses. GRIM computation based onregulatory level selected by user. (14) SG&A: Selling, general and administrative costs are computed as apercentage ofRevenues (4).

### (15) ProfitBefore Tax: Profit before taxes and any financing costs; computed by subtracting the Cost ofSales (11) and SG&A (14) fromRevenues (4). (16) Taxes: Taxes onProfitsBefore Tax; computed by multiplying the tax rate contained in Major Assumptions byProfitBefore Tax (15). (17) Net Income: Profits aftertaxes; computed by subtracting Taxes (16) fromProfitbefore Tax (15). (18) CashFlow Statement: Overall assessment including net income, other cash related items and adjustments and investments. (19) CashFlow: Determination ofcash flow generated from operations. (20) NetIncome: Net income; identical toNetIncome (17). (21) Depreciation: Depreciation is anon-cash cost and is added back intoNetIncome (20) as partofthe cash flow calculation; identical to Depreciation (10). (22) Changein Working Capital: Additional accounts receivable, inventory, and other cash investments necessary to support increased revenues; computed by multiplying apercentage from Major Assumptions by the change in Revenues (4). (23) CashFlowfrom Operations: The cash flow from operating activities; computed by addingNetIncome (20), Depreciation (21) and subtracting Change in Working Capital(22). (24) CapitalExpenditures: Investment tomaintain and replace existing production assets; computed as a percentage ofbase yearRevenues (4) using apercentage contained in Major Assumptions. Post-regulation capital expenditures equal pre-regulation expenditures plus depreciation on Conversion Expenditures (25). (25) Conversion Expenditures: Depreciation costs for meeting regulations, typically including plant, equipment, tooling and the like; GRIM computation based onregulatory level selected by user.

### (26) Cash Usedin Investments: Cash required for assets; computed by adding CapitalExpenditures (24) and Conversion Expenditures(25). (27) Net CashFlow: Annual cash flow from operations and investments; computed by subtracting Cash UsedinInvestments (26) from CashFlowfrom Operations(23). (28) Post-RegulationValue: Value ofthe relevant industry following adoption and implementation ofthe regulatory scenario; the present value ofthe annualNet CashFlow(27) from the base yearto five years after the regulation goes into effect, plus aterminal value based on the finalyear's cash flow valued as an annuity, are computed by model and listed. The discounted rate for thepresent value is the "INTEREST RATE" contained in Major Assumptions. Pre-regulation value is computed by taking thebase yearNet Cash Flow(27), excluding any regulation effects, and treating itas aperpetual annuity.

## Attachment E: Cash Flow OutputsFigure 1: Base Case Cash Flow

BASE CASE SCENARIO Bas Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UmtSales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 1034 10.47 10.64 10.83 11.03 

### ~Rev~venes 1: 1.33929 1.381.76 1415.091 1.44324 147068 1.49925 1522.13 11.54205 1566.0 5 1594.52 1,618.48 1,639.60 1,665.57 1,695.65 1,726.70 Coslof s - ale
- - -s Labor 91.66 94.57 96.81 98.71 100.56 102.49 104.03 105.39 107.04 109.01 110.67 112.13 113.93 116.00 118.12 Maneial 592.10 610.78 625.55 638.01 650.21 662.98 673.23 682.07 692.67 705.23 715.79 725.10 736.56 749.84 763:61 Overhead

-Fixed

_ Ovoed

-Vmkblek 414.02 427.25 437.56 446.27 454.71 463.44 470.40 476.53 483.95 492.76 500.18 506.71 514.74 524.05 533.60 DepiMion 41. 42.8 43.9 44.7 456 46.5 47.2 47.8 48.5 49.4 50.2 50.8 51.6 52.6 53.5 Seling (ieneralmdAdminisrative StndardSG&A 120.5 124.4 127.4 129.9 132.4 134.9 137.0 138.8 140.9 143.5 145.7 147.6 149.9 1526 155.4 R&D 134 13.8 142 14.4 14.7 15.0 15.2 154 15.7 15.9 16.2 164 16.7 17.0 17.3 Poduct ConversionExpase

- - - - - Prfit BeforeTax 66.1 68.2 69.8 71.2 72.5 73.9 75.1 76.1 77.2 786 79.8 80.9 82.1 83.6 85.2 Taxes 25.1 25.9 26.5 27.0 27.6 28.1 28.5 28.9 29.4 29.9 30.3 30.7 31.2 31.8 32.4 NdIncome Before Fimeing 41.0 423 43.3 44.1 45.0 45.8 46.5 47.2 47.9 48.8 49.5 50.1 50.9 519 52.8

NetInome 41.0 42.3 43.3 44.1 45.0 45.8 46.5 47.2 47.9 48.8 49.5 50.1 50.9 51.9 52.8 Depraimon 41.5 42.8 43.9 44.7 45.6 46.5 47.2 47.8 48.5 49.4 50.2 50.8 51.6 52.6 53.5 Chagein WoringCapitI

- (6.6) (5.2) (4.4) (4.3) (4.5) (3.6) (3.1) (3.8) (4.5) (3.7) (3.3) (4.1) (4.7) (4.9) Cash Flosfium Opmraai 825 784 81.9 84.5 863 87.9 90.2 91.8 92.7 937 959 97.7 985 99.7 101.5 Ordimay Capital Expqndimres (60.3) (62.2) (63.7) (64.9) (66.2) (67.5) (68.5) (69.4) (70.5) (71.8) (72.8) (73.8) (75.0) (763) (77.7) Cornvi Ceait Expenditures Cah Used Invstinrnt (60.3) (622) (63.7) (64.9) (66.2) (67.5) (68.5) (69.4) (70.5) (71.8) (72.8) (73.8) (75.0) (76.3) (77.7) NtCashFlow 22.2 16.3 18.2 19.5 20.1 20.4 21.7 22.4 22.2 22.0 23.1 23.9 23.6 23.4 23.8 Teminal Value 297.5 Pent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 DiscormtdCashFlow 22.2 15.1 15.6 15.5 14.8 13.9 13.7 13.1 12.0 11.0 10.7 10.3 9.4 8.6 109.5 Industy Value (NtPrlet Value) S 295.3Figure 2: Standard Level 1,Business Scenario 2, Cumulative

STANDARD CASE SCENARIO 8a.. Y ar Announce Year Standlrd Yr., 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.0 Revenues 1339.33 1381.29 1414.78 1443.01 1470.39 1727.99 1754.56 1777.72 1805.45 1838.35 1865.97 1890.3 1920.32 1955.1 1991.13 (Cos

of

Sales Labor 91.67 994.521 96.78 98.69 100.53 105.61 107.21 108.63 110.35 112.39 114.10 115.61 1174 119.6 11. Matenal 592.12 610.55 625.39 637.90 650.06 829.95 842.87 54.03 86732 883.07 896.28 907.9 922.29 939 956.3 Overhead

-Fixed 0.00 O.O 0.001 0.00 o0.00 0. 0.00 0.00 0.00 o.ol 0.00 0.00 0 Overhead-Vaiable 414.03 427.15 437.49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.4 530.78 54041 550 Depreciation 415 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 Selling General and

Amrnistrarive StandardSG&A 120.5 124.3 127.3 129.9 132.3 155.5 157.9 160.0 162.5 165.5 167.9 170.1 172.8 176.0 179.2 R&D 13.4 13.8 14.1 14.4 14.7 17.3 17.5 17.8 18.1 18.4 18.7 18.9 19.2 19.6 19.9 Product Conveion Expense - - 4.1 5.7 6.5 0.3

- - - - - PofitBefore Ta 66.1 68.1 65.7 65.5 66.0 73.8 75.3 76.3 77.5 78.9 80.1 81.1 82.4 83.9 85.4
Txes 25.1 25.9 25.0 24.9 25.1 28.0 28.6 29.0 29.4 30.0 30.4 30.8 31.3 31.9 32.5 Ndt

InomeBefore Financing 41.0 42.2 40.7 40.6 40.9 45.8 46.7 47.3 48.0 48.9 49.6 50.3 51.1 52.0 53.0

NetIncome 41.0 42.2 40.7 40.6 40.9 45.8 46.7 47.3 48.0 48.9 49.6 50.3 51.1 52.0 53.0 Dcpreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 ChangeinWorking Capital - (6.6) (5.2) (4.4) (4.3) (40.3) (4.2) (3.6) (4.3) (5.1) (4.3) (3.8) (4.7) (5.4) (5.6) Cash Flows fromOpration 82.5 78.5 79.4 80.9 82.2 73.3 111.4 113.4 114.5 115.9 118.5 120.7 121.8 123.3 125.5

Ordinary CapitalExpeditnres (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3) Conversion Capital Expenditures - (23.8) (33.4) (38.2) CashUsed InInvesent (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3) NctCash Fow 22.2 16.3 (8.2) (17.4) (22.1) (15.5) 21.2 22.1 21.8 21.4 22.7 23.5 23.1 22.8 23.2 Terminal Value 289.9 PesentValueFactor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Disouted CashFlow 22.2 15.1 (7.0) (13.8) (16.2) (10.6) 13.4 12.9 11.8 10.7 10.5 10.1 9.2 8.4 106.7 Industry Value (NetPresentValue) S 183Figure 3: StandardLevel 2, Business Scenario 2, Cumulative

STANDARD CASE SCENARIO Bas Vea Announce «ear Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSale 8.56 8.83 9.04 :9.22 9.39 9.51 9.72 9.85 10.00 10.18 10.34 10.48 10.65 10.85 11.06 Revenues 1339.29 1381:76 1415.09 1443.24 1470.68 1851.30 1879.67 1904.18 1933.63 1969.01 1999.03 2025.73 2058.73 2097.14 2137.10 CostofSales Labor 91.66 94.57 96.81 98.71 100.56 115.99 117.76 119.30 121.161 123.3 125.2 126.98 129.06 13 3.9 Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.91 969.71 985.4 1003.89 1023.12 Overhead

-Fixed .O 0.o 0 .00 0 .00 00.00

. 0.00 600.0. 0.000 0.00 0.00 0.00 Overhead

-Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.04 547.94 556.33 563.80 572.9 583.6 594.6 Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 781 79.5 80.8 81.8 83.1 84.6 86.2 Selling. GeneralandAdmtninstralve Standard SG&A 120.5 124.4 127.4 129.9 132.4 1666 169.2 171.4 174.0 177.2 179.9 182.3 185.3 18.7 192.3 R&D 13.4 138 14.2 14.4 14.7 18.5 18.8 19.0 19.3 19.7 20.0 20.3 20.6 21.0 21.4 ProductConvenion Expense- - 9.6 13.4 15.4 0.8 - - - - - - Profit Before Tax 66.1 68.2 60.2 57.7 57.2 73.1 75.0 76.0 77.1 78.6 79.8 80.8 82.2 83.7 85.4 Taxes 25.1 25.9 22.9 21.9 21.7 27.8 28.5 28.9 29.3 29.9 30.3 30.7 31.2 31.8 32.4 Netncome Before Finmcing 41.0 42.3 37.3 35.8 35.5 45.3 46.5 47.1 47.8 48.7 49.5 50.1 51.0 51.9 52.9

Netlncome 41.0 42.3 37.3 35.8 35.5 45.3 46.5 47.1 47.8 48.7 49.5 50.1 51.0 51.9 52.9 Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2 Change inWoking Capital

- (6.6) (5.2) (4.4) (4.3) (59.6) (4.4) (3.8) (4.6) (5.5) (4.7) (4.2) (5.2) (6.0) (6.3) CashFlowsfrom Operations 82.5 78.4 76.0 76.1 76.7 60.5 118.0 120.2 121.3 122.7 125.5 127.8 128.9 130.6 132.9 OrdinaryCapitalExpenditues (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) Conveion Capital Expenditures - - (31.6) (44.3) (50.6) - - Cash Used InInvesment (60.3) (62.2) (95.3) (109.2) (116.0) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) NetCash low 22.2 16.3 (19.3) (33.1) (40.0) (35.2) 20.8 21.7 21.3 20.8 22.1 23.0 22.5 22.2 22.5 Terminal Value 281.7 Present Vale Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Disconted CshFlow 22.2 15.1 (16.6) (26.3) (29.4) (24.0) 13.1 12.7 11.5 10.4 10.2 9.9 8.9 8.2 103.7 Industry Value(NetPresent Value) S 130Figure 4: StandardLevel 3, Business Scenario 2, Cumualtive

STANDARD CASE SCENARIO Bau Y*a Announe Year Standlad Y*r. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales .56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.I19 10.3 10.49 10.6 10.86 11.07 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 2031.43 2062.27 2089.08 2121.39 2160.59 2194.03 2223.98 2260.96 2304.0 2348.86 CostofSoles

_ : ' : _I Labor 91.66 94.57 96.81 98.71 100.56 125.10 127.00 128.66 130.67 133.11 135.18 137.05 139.33 141.98 144.72 Material 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48 Overhead- Fixed 0.00 0.00 0.00 0.00 0.0o 0.00 0.00 0.00 0.00 0.00 0.0 0.00 O 0.00 0.0.0 Overead -Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07 Depreciation 41.5 428 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Selling,Generaland Administratrve Standard SG&A 120.5 124.4 127.4 129.9 132.4 182.8 185.6 188.0 190.9 194.5 197.5 200.2 203.5 207.4 211.4 R&D 13.4 13.8 14.2 14.4 147 20.3 20.6 20.9 21.2 21.6 21.9 22.2 22.6 23.0 23.5 Product Conversion Epense

- - 6.4 9.0 10.2 0.5

- - - - Profit Before Tax 66.1 68.2 63.4 62.2 62.3 74.8 76.5 77.4 78.6 80.1 81.3 82.5 83.9 85.5 87.3 Taxes 25.1 25.9 24.1 23.6 23.7 28.4 29.1 29.4 29.9 30.4 30.9 31.3 31.9 32.5 33.2 NetIncome BeforeFinacing 41.0 42.3 39.3 38.6 38.6 46.4 47.4 48.0 48.8 49.7 50.4 51.1 52.0 53.0 54.1

Net ncome 41,0 42.3 39.3 38.6 38.6 46.4 47.4 48.0 48.8 49.7 50.4 51.1 52.0 53.0 54.1 Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Change inWorking Capital - (6.6) (5.2) (4.4) (4.3) (87.8) (4.8) (4.2) (5.1) (6.1) (5.2) (4.7) (5.8) (6.7) (7.0) CashFlowsfrom Operaons 82.5 78.4 78.0 78.9 79.9 56.0 141.5 144.0 145.4 147.1 150.4 153.0 154.6 156.6 159.5 Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) Conversion Capital Expenditures (56.9) (79.6) (91.0) CashUsd InInvestment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) NetCashFlow. 22.2 16.3 (42.6) (65.7) (77.3) (62.4) 21.3 22.2 21.8 21.2 22.5 23.5 22.9 22.6 22.9 Terminal Value 286.9 Preent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discoonted Cash Flow 22.2 15.1 (36.5) (52.1) (56.8) (42.5) 13.4 13.0 11.8 10.6 10.5 10.1 9.1 8.3 105.6 Industry Value (Net PreentValue) S 42Figure 5: StandardLevel 4, Business Scenario 2, Cumulative

1u P = H:^^ esatoraiii teraiiiiiiii

STANDARD CASE SCENARIO Ba.se Yar Announce Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 .1 10.33 10.46 10.63 10.81 1101 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 2759.01 2803.61 2841.32 2885.03 2935.35 2976.66 3012.75 3057.58 3110.17 3165.3 Costof Sales Labor 91.66 94.57 96.81 98.71 100.56 i 15178 154.19 156.25 158.68 161.49 163.82 165:5 168.36 171.2 174.3 Material 592.10 610.78 625.55 638.01 650.21 1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12 Overhead

-Fixed .00 0.00 0.00 0.00 0.00 0 .00 0.00 0.00 0.00 8.00 0.00 0.00 8.00 .00 0.00 Overhead- Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.0 834.65 844.84 857.51 872.34 887.85 Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 1343 136.7 139.2 Selling Generaland Administrarie Standard SG&A 120.5 124.4 127.4 129.9 132.4 248.3 252.3 255.7 259.7 264.2 267.9 271.1 275.2 279.9 284.9 R&D 13.4 13.8 14.2 14.4 14.7 27.6 28.0 28.4 28.9 29.4 29.8 30.1 30.6 31.1 317 Product Conversion Expense - 8.8 12.3 14.1 0.7
- ProfitBefore Tax 66.1 68.2 61.0 58.8 58.4 85.3 87.5 88.8 90.1 91.6 92.8 93.8 95.1 967 98.4
Taxes 25.1 25.9 23.2 22.4 22.2 32.4 33.3 33.7 34.2 34.8 35.3 35.7 36.1 36.7 37.4 NetIncome Before Finacing 41.0 42.3 37.8 36.5 36.2 52.9 54.3 55.0 55.9 56.8 57.5 58.2 59.0 59.9 61.0

Net hncome 41.0 42.3 37.8 36.5 36.2 52.9 54.3 55.0 55.9 56.8 57.5 58.2 59.0 59.9 61.0 Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2 ChangeinWorkingCapital - (6.6) (5.2) (4.4) (4.3) (201.6) (7.0) (5.9) (6.8) (7.9) (6.5) (5.6) (7.0) (8.2) (8.6) CashFlows fromOperations 82.5 78.4 76.5 76.8 77.5 (27.8) 170.1 173.5 175.4 177.5 181.6 184.7 186.3 188.4 191.5

OrdinaryCapital Expeditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) Conversion Capital Expenditures (83.2) (116.5) (133.1) Cash Used InInvestment (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) NetCashFlow 22.2 16.3 (70.4) (104.6) (121.8) (169.7) 26.0 27.5 27.1 26.6 28.4 29.6 28.6 28.0 28.2 Terminal Value 352.7 Prsent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted CashFlow 22.2 15.1 (60.4) (83.1) (89.5) (115.6) 16.4 16.1 14.6 13.3 13.2 12.7 11.4 10.3 129.8 Industry Value (NetPresentValue) S (74)Figure 6: Standard Level 1,Business Scenario 2, Standard

V APVN Ma-C, .C A i

STANDARD CASE SCENARIO Bae Y.ar Announc.Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83

. 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 104 1103 Retvenues 1339.33 1381l.2 : 1414.78 1443.01 1470.39 154915 1572.89 1593.64 1618.56 1648.16 1673.03 1694.97 1721.93 175317 1785.41 Cotof Soles Labor 91.67 94.52 96.78 9869 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.4 118.54 12.71 Material 59212 610.55 625.39 637.90 650.06 698.79 709.58 718.97 730.21 743.53 754.72 764.58 776.7 790.80 805.39 Overhead - Fined 0 0 80.00 0.0( 0.01 O.0 0.00 08.00 0.00 0.00 0.00 0.00 0.00 0.0. 0.00 0.00 Overhead -Variable 41403 427.15 437.49 446.22 454.6 469.59 476.64 482.89 490.43 499.41 506.96 513.63 521.81 531.21 541.01 Depreciation 41.5 42.8 43.9 44.7 45.6 469 47.6 482 48.9 49.8 50.6 51.2 521 53.0 54.0 Selling Gteneral nd A insdAd irative Standard SG&A 1205 124.3 127.3 129.9 132.3 139.4 1416 143.4 145.7 148.3 1506 152.5 155.0 157.8 160.7 R&D 134 13.8 14.1 14.4 14.7 15.5 15.7 159 16.2 16.5 16.7 169 17.2 17.5 17.9 Product Converon Expense - 15 2.1 2.4 0.1

- - - ProfitBefore Tax 66.1 68.1 68.3 69.1 70.1 74.3 75.6 76.6 77.8 79.2 80.4 81.4 82.7 84.2 85.8
Taxes 25.1 25.9 25.9 26.2 26.6 28.2 287 29.1 29.5 30.1 30.5 30.9 31.4 32.0 32.6 NetIncome Before Financing 41.0 42.2 42.3 42.8 43.5 46.1 46.8 47.5 48.2 49.1 49.8 50.5 51.3 52.2 53.2

Net neome 41.0 42.2 42.3 42.8 43.5 46.1 46.8 47.5 48.2 49.1 49.8 50.5 51.3 52.2 53.2 Deprecition 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0 Change inWoring Capitl - (6.6) (5.2) (4.4) (4.3) (12.3) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.0) Cash Flows from Oprations 82.5 78.5 81.0 83.1 84.8 80.6 90.7 92.4 93.3 94.3 96.5 98.3 99.1 100.3 102.1 Ordinary CapitalExpendiures (60.3) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) Conversion Capital Ependitures - - (0.4) (0.6) (0.7) CashUsed nInvestment (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) NetCashFlow 22.2 16.3 16.8 17.6 17.9 12.7 21.8 22.6 22.4 22.1 23.3 24.1 23.8 23.6 24.0 Terminal Value 300.0 Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 DiscountedCash Flow 22.2 15.1 14.4 14.0 13.2 87 13.8 13.2 12.1 11.1 10.8 10.3 9.4 8.7 110.4 Indusoy Value (Net Present Value) S 287Figure7: StandardLevel 2, Business Scenario 2, Standard

STANDARD CASE SCENARIO B.s. Y.r Announ c Year Standerd Y..r 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 1 10,18 104.3 10.48 10.6 5 11.06 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 1671.13 1696.60 1718.72 1745.3 1777.43 1804.63 1828.84 1858.67 1893.34 1929.30 Costof Sales_Labor 91.66 94.5 96.81 98.71 :100.56 115.03 116.78 118.31 120.15 122.37 124.26 125.94 128.00 130.39 132.86 Material 592.10 610.781 625.55 638.01 650.21 754.38 765.97 775.98 787.99 802.41 814.65 825.55 839.01 854.6 870.99 Ovetcad

-Fixed 0.00 0.00 0.00 0.00 0.00 0.00 0.00

. 0.00 0.00 0.00 0.0o 0.0 0.00 0.00 Overhead -Variable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.83 563.8 574.37 585.21 Deprecition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6 Selling.GeneralandAdinistraoive Standard SG&A 120.5 124.4 127.4 129.9 132.4 150.4 152.7 154.7 157.1 160.0 1624 164.6 167.3 170.4 173.6 R&D 13.4 13.8 14.2 14,4 14.7 16.7 17.0 17.2 17.5 17.8 18.0 18.3 18.6 18.9 19.3 Product Conversion Expnse - 7.0 9.8 11.2 0.6

- - - - Profi Beore Tax 66.1 68.2 62.8 61.4 61.3 73.6 75.3 76.3 77.5 78.9 80.1 81.2 82.5 84.1 85.8
Taxes 25.1 25.9 23.9 23.3 23.3 28.0 28.6 29.0 29.4 30.0 30.4 30.9 31.4 32.0 32.6 Net Income Before Finacing 41.0 42.3 38.9 38.1 38.0 45.6 46.7 47.3 48.0 48.9 49.7 50.3 51.2 52.2 53.2

Netncome 41.0 42.3 38.9 38.1 38.0 45.6 46.7 47.3 48.0 48.9 49.7 50.3 51.2 52.2 53.2 Deprcition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6 Change inWorkingCapital- (6.6) (5.2) (4.4) (4.3) (31.4) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.4) (5.6) Cah Flow from Operations 82.5 78.4 77.6 78.4 79.3 67.7 96.9 98.8 99.7 100.7 103.1 105.0 105.9 107.2 109.1 Ordinary Capital Expeditures (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) Conversion Capital Expendires - - (7.8) (10.9) (12.4) Cash Used In nvestmcnt (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) Net Cah Flow 22.2 16.3 6.1 2.6 0.7 (6.7) 21.4 22.2 21.9 21.6 22.8 23.6 23.2 23.0 23.4 Terminl Value 292.4 Present Value Factor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Dicounted CashFlow 222 15.1 5.3 2.0 0.5 (4.6) 13.5 13.0 11.9 10.8 10.5 10.1 9.2 8.5 107.7 Industry Value (NetPesentValue) S 236Figure8: StandardLevel 3, Business Scenario 2, Standard
i, ,,

~,,~ Wtmer~teMoiw I R= = ^..=,hS= ,=,,~i,
STANDARD CASE SCENARIO Base Year Announce var Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11.07 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 1849.91 1877.89 1902.36 1931.90 : 1967.75 1998.33

. 2025.72 2059.43 2098.61 :2139.24 Cost o/Sales : ',

_____________ Labor. 91.66 94.57 96.81 98.71 100.56 124.13 126.01 127.66 129.66 132.07 134.14 135.99 138.25 140.88 143.60 Material 592.10 610.72 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869.48 882.97 895.05 909.95 927.28 945.3 Overhead- Fixed 0.00 OM 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0 0.00 0.0 0.00 0.00 0.00 Overhead

-Variable 414.02 427.25 437.56 446.27 454.71 72.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.4 Deprecition 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 Selling.Generaland Adtrinisrawve Stndard SG&A 120.5 124.4 127.4 129.9 132.4 166.5 169.0 171.2 173.9 177.1 179.9 182.3 185.3 1889 192.5 R&D 13.4 13.8 14.2 14.4 14.7 18.5 18.8 19.0 19.3 19.7 20.0 20.3 20.6 21.0 21.4 ProductConversion Expense - 3.8 5.3 6.0 0.3

- - - - - Profit BforeTax 66.1 68.2 66.0 659 66.5 75.3 76.8 77.8 79.0 80.4 81.7 82.9 84.3 85.9 87.7
Taxes 25.1 25.9 25.1 25.1 25.3 28.6 29.2 29.5 30.0 30.6 31.1 31.5 32.0 32.7 33.3 Net Income Before Financing 41.0 42.3 40.9 40.9 41.3 46.7 47.6 48.2 49.0 49.9 50.7 51.4 52.3 53.3 54.4

Net Income 410 42.3 40.9 40.9 41.3 46.7 47.6 48.2 49.0 49.9 50.7 51.4 52.3 53.3 54.4 Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 ChangeinWoking Capital - (6.6) (5.2) (4.4) (4.3) (59.3) (4.4) (3.8) (4.6) (5.6) (4.8) (4.3) (5.3) (6.1) (6.4) Cash FlowsfromOperations 82.5 78.4 79.6 81.2 82.5 63.0 120.0 122.2 123.4 124.8 127.6 129.9 131.1 132.9 135.3 Ordinay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) ConversionCapital Expendintres (32.6) (45.7) (52.2) CashUsed IInvestment (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) NetCash Flow 22.2 16.3 (16.7) (29.4) (35.8) (33.6) 21.9 22.8 22.4 21.9 23.2 24.1 23.7 23.4 23.8 Terminal Value 298.2 Peenat Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (14.3) (23.3) (26.3) (22.9) 13.8 13.3 12.1 11.0 10.8 10.4 9.4 8.6 109.8 Industry Value (Net PresentValue) S 149Figure9: StandardLevel 4, Business Scenario 2, Standard

STANOARD CASE SCENARIO Bau Year Announc. Y..r Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sles 8.56 8:83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.33 10.46 10.63 10.81 11.01 Revenues 1339.29 1381.76 1415.09 : 1443.24 1470.68 2581.24 2622.95 2658.24 2699.16 2746.27 2784.96 2818.76 2860.71 2909.9 : 2961.52 Cost

ofSales__

_ ' ' ' " ' Labor 91.61 94.57 96.81 98.71 100.56 150.86 153.24 155.29 157.71 160.50 162.82 164.84 167.34 170:24 173.25 Material 592.10 610.78 625.55 638.01 650.21 1219.81 1239.79 1256.59 1275.93 1298.08 1316.22 1332.06 1351.74 1374.85 1399.1 Overbend
-Fixd 0.0( 0.04 0.0( e o0 ooo o.oo0 o.oo0 o.ooT o.oo7 o.oo o.ol o.o- o. Overitead

-Fixed 0.00 0.008.00 · .00 .00 0.00 0.00 0.00 0.00 0.00 0.00 8.0 0.00 0.00 0.00 Overhead-Variable 414:02 427.25 437.56 446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 878.79 Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4 Sellng,Generaland Administralive Standard SG&A 120.5 124.4 127.4 129.9 132.4 232.3 236.1 239.2 242.9 247.2 250.6 253.7 257.5 261.9 266.5 R&D 13.4 13.8 14.2 14.4 147 25.8 26.2 26.6 27.0 27.5 27.8 28.2 28.6 29.1 29.6 Product Conversion Expens- - 6.3 8.8 10.1 0.5 Profit Before Tax 66.1 68.2 63.5 62.4 62.4 85.8 87.7 89.0 90.3 91.8 93.1 94.1 95.4 97.0 98.7 Taxes 25.1 25.9 24.1 23.7 23.7 32.6 33.3 33.8 34.3 34.9 35.4 35.8 36.3 36.9 37.5 Net Income BefoeFiancing 41.0 42.3 39.4 38.7 38.7 53.2 54.4 55.2 56.0 56.9 57.7 58.4 59.2 60.2 61.2

Net Income 41.0 42.3 39.4 38.7 38.7 53.2 54.4 55.2 56.0 56.9 57.7 58.4 59.2 60.2 61.2 Depreciation 41.5 42.8 43.9 44.7 456 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 1134 115.4 Chtage in Working Capital- (6.6) (5.2) (4.4) (4.3) (173.8) (6.5) (5.5) (6.4) (7.4) (61) (5.3) (6.6) (7.7) (8.1) Cash Flows fromOperations 82.5 78.4 78.0 790 80.0 (20.3) 149.7 152.8 1544 156.2 159.9 1627 164.0 165.8 1686

Ordintay CapitalExpenditures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (1267) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6) Conversion Capital Expenditures

- (60.1) (84.2) (96.2) Cash Used In nvestment (60.3) (62.2) (123.8) (149.2) (162.4) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6) NtCashFlow 22.2 16.3 (45.8) (70.2) (82.4) (141.6) 26.6 28.0 27.7 27.2 29.0 30.1 29.3 28.7 29.0 Termial Value 362.4 Present Value Factor 1.000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 05839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15. (39.3) (55.7) (60.6) (96.4) 167 16.4 15.0 136 13.4 12.9 116 106 133.4 Industry Value (Net Present Value) S 29Figure 10: Standard Level 1,Business Scenario 3, Cumulative

STANDARD CASE SCENARIO Base YIar Announce Year Sflndr.d YIar 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03 Revenues 1339.33 1381.29 .1414.78 1443.01 1470.39 1743.17 1769.91 1793.33 , 1821.30 1854.49 188 2.35 1906.92 1937.17 1972.27 2008.60 Cosof Sales I I 0 Labor 91.67 94.52 96.78 98.69 100.53 105.61 107:21 108:63 110.35 112.39 114.10 115.61 117.46 11960 121.80 Material 592.12 610:55 625.39 637.90 650.06 829.95 842:87 854.03 867.32 883.07 896.28 907.92 922.29 938.97 95632 Ovehead- Fixed 0.00 0.0 10.500 0.00 .9 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0. 0.00

. . Overhead- Variable 414.03 427.15 437:49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.47 530.78 540.41 550.32 Depreciaion 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 Selling. GeneralandAdminisrative Standard SG&A 120.5 124.3 127.3 129.9 132.3 156.9 159.3 161.4 163.9 166.9 169.4 171.6 174.3 177.5 180.8 R&D 13.4 13.8 14.1 14.4 14.7 17.4 17.7 17.9 18.2 18.5 18.8 19.1 19.4 19.7 20.1 Product Conversion Expense- - 4.1 5.7 6.5 0.3

- - - - Profi Before Tax 66.1 68.1 65.7 65.5 66.0 87.5 89.2 90.3 917 93.4 94.8 96.0 97.6 99.3 101.2 Taxes 25.1 25.9 25.0 24.9 25.1 33.2 33.9 34.3 34.9 35.5 36.0 36.5 37.1 37.7 38.4 Net Income Before Financing 41.0 42.2 40.7 40.6 40.9 54.2 55.3 56.0 56.9 57.9 58.8 59.5 60.5 61.6 62.7

Ndtncome 41.0 42.2 40.7 40.6 40.9 54.2 55.3 56.0 56.9 57.9 58.8 59.5 60.5 61.6 62.7 Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 Change in Working Capital- (6.6) (5.2) (4.4) (4.3) (42.7) (4.2) (3.7) (4.4) (5.2) (4.4) (3.8) (4.7) (5.5) (5.7) Cash Flows frm Operations 825 78.5 79.4 80.9 82.2 79.4 119.9 122.1 123.4 124.9 127.6 129.9 131.1 132.8 135.2 Ordinary Capital Expendires (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3) Conversion Capital Expenditures

- (23.8) (33.4) (38.2) Cash Used InInvetment (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (987) (100.5) (102.3) NetCashFlow 22.2 16.3 (8.2) (17.4) (22.1) (9.5) 29.8 30.8 30.6 30.4 31.8 32.7 32.4 32.4 32.9 Terminal Value 411.3 Pesent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 DicontedCash Flow 22.2 15.1 (7.0) (13.8) (16.2) (6.4) 18.8 18.0 16.5 15.2 14.7 14.1 12.9 11.9 151.4 Industry Value (Net Present Value) S 267Figure 11: StandardLevel 2, Business Scenario 3, Cumulative

i.,",n

7:, .577,:,'7 7Wet .? . , 7 .7' , -. :.. v I=E q STANDARD CASE SCENARIO 0... Y..r Announce Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Unit Sales 8.56 .83 9.04 9.22 9.39 9.58

. 9.72 9.85 10.00 10:18 10.34 10.48 10.65 10.85 11.06 Revenues 1339.29 1381.76 1415.09 1443.24 1470.6 8 1873.74 1902.46 1927.27 1957.07 1992.87 2023.24 2050.26 2083.65 2122.53 2162.98 Costof& Sles

k :I : . "

Labor 91.66 94.57 96.81 98.71 100.56 115.99 117.76 119.30 121:16 123.39 125.29 126.98 129.06 13147 1339 Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.98 969.71 985.49 100389 1023.12 Overehad
-Fied 0.00 .0.0 8.08 0.00 0 .00 8.00..080 0.00 0.00 0.80 0.0 0 000 : 0.080 O.0 0.00 0.00 Overhead

-Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.04 547.94 556.33 563.80 572.99 583.66 594.69 Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 808 81.8 83.1 84.6 86.2 Selling. Generl andAdninistrativ Standard SG&A 120.5 124.4 127.4 129.9 132.4 168.6 171.2 173.5 176.1 179.4 182.1 184.5 187.5 191.0 194.7 R&D 13.4 13.8 142 14.4 14.7 18.7 19.0 19.3 19.6 19.9 20.2 20.5 20.8 21.2 21.6 Product Conversion Expense-

- 9.6 13.4 15.4 0.8
- - - Profil Befon Tax 66.1 68.2 60.2 57.7 57.2 93.3 95.5 96.8 98.2 100.0 101.6 102.9 104.6 106.6 108.7 Taxes 25.1 25.9 22.9 21.9 21.7 35.4 36.3 368 37.3 38.0 38.6 39.1 39.8 40.5 41.3 Net Inome Befoe Financing 41.0 42.3 37.3 35.8 35.5 57.8 59.2 60.0 60.9 62.0 63.0 63.8 64.9 66.1 67.4

Net ncome 410 42.3 37.3 35.8 35.5 57.8 59.2 60.0 60.9 62.0 63.0 63.8 64.9 66.1 67.4 Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2 Changen WorkigCapital- (6.6) (5.2) (4.4) (4.3) (63.1) (4.5) (3.9) (4.7) (5.6) (4.8) (4.2) (5.2) (6.1) (6.3) CashFlows fromOperatios 82.5 78.4 76.0 76.1 76.7 69.5 130.7 133.0 134.4 136.0 139.0 141.4 142.8 144.7 147.3 Ordinary CapitlExpenditures (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) Coversion Capital Expenditures - (31.6) (44.3) (50.6) -- CashUsed In Invetrcnt (60.3) (62.2) (95.3) (109.2) (116.8) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) NetCash Flow 22.2 16.3 (19.3) (33.1) (40.0) (26.2) 33.4 34.5 34.3 34.1 35.6 36.6 36.3 36.3 36.9 Termial Valu 461.5 Present ValueFactor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (16.6) (26.3) (29.4) (17.9) 21.1 20.2 18.6 17.1 16.5 15.7 14.4 13.4 169.9 Industy Value (NetPesentValue) S 254Figure 12: StandardLevel 3, Business Scenario 3, Cumulative

STANDARD CASE SCENARIO Base er Announce Ver StandardYear 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSales 8.56 8.83 9.04 9.22 .9.39

. 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11.07 Revenues 1339.2 1 1381.76 1415.09 1443.24 1470.68 2065.74 2097.10 2124.36 2157.22 2197.07 2231.07 2261.52 2299.12 2342.94 2388.51 CostofSaIes Labor 91.66 94:57 96.81 98.71 100.56 125.10 127.00 128.66 130.67 133.11 135181 137.05 139.33 141.98 144.72 Material 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48 Overhead

-Fixed 0.00 0.001 0.010. 0.010 0.0 0.00 0 .0 00.0 0.0 0 0 0.00 Overhead- Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07 Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Selling. CeneralandAdministraltiv Standard S&A 120.5 124.4 127.4 129.9 132.4 185.9 188.7 191.2 194.1 197.7 200.8 203.5 206.9 210.9 215.0 R&D 13.4 13.8 14.2 14.4 14.7 20.7 21.0 21.2 21.6 22.0 22.3 22.6 23.0 23.4 23.9 Product Conversion Expens-

- 6.4 9.0 10.2 0.5

- rofitBefore Ta 66.1 68.2 63.4 62.2 62.3 105.7 107.8 109.2 110.9 112.9 114.7 116.3 118.2 120.5 123.0
Taxes 25.1 25.9 24.1 23.6 23.7 40.2 41.0 41.5 42.1 42.9 43.6 44.2 44.9 45.8 46.7 Net Income Before Finacing 41.0 42.3 39.3 38.6 38.6 65.5 66.8 67.7 68.7 70.0 71.1 72.1 73.3 74.7 76.2

Ne Income 41.0 42.3 39.3 38.6 38.6 65.5 66.8 67.7 68.7 70.0 71.1 72.1 73.3 74.7 76.2 Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Changei Woring Capital- (6.6) (5.2) (4.4) (4.3) (93.1) (4.9) (4.3) (5.1) (6.2) (5.3) (4.8) (5.9) (6.9) (7.1) CashFlows fromOperations 82.5 78.4 780 78.9 79.9 69.8 160.8 163.6 165.3 167.4 171.0 173.9 175.8 178.2 1815 Ordinary Capital Ependitues (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) Conversion Capital Expenditures

- (56.9) (79.6) (91.0) CashUsed InInvestment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) NetCash Flow 22.2 16.3 (42.6) (65.7) (77.3) (48.6) 40.6 41.8 41.7 41.5 43.1 44.4 44.1 44.1 44.9 TerminalValue 562.4 Pesent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 06305 0.5839 0.5407 05007 0.4636 04293 0.3976 0.3681 0.3409 DiscountdCash Flow 22.2 15.1 (36.5) (52.1) (56.8) (33.1) 25.6 24.4 22.5 20.8 20.0 19.0 17.5 16.3 207.0 Industy Value (Net resent Value) S 232Figure 13: StandardLevel 4, Business Scenario 3, Cumulative

ijl .S.? WaifroHateeai.,, = .*g
STANDARD CASE SCENARIO Base YV.r Announce Ya. r Standard .. ar 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 t 0.33 10.46 10.63 10.81 11.01 Revenues 1339.29 1381.76 M1415.0 1 443.24 1470.68 2809.15 2954.61 2893:03 2937.52 2988.72 3030.74 3067.45 3113.05 3166.57 3222.73 Costof Sleso _, Labor 91.66 94.571 96.11 98.71 100.56 M151.78 154.19 156.25 158:681 161.49 163.82 165.85 168.36 171.28 174.31 Material 592.10 610.78 625.55 638.01 650.21 1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12 Overhead

-Fixed 0.00 0.00 0.0O 0.00 0.00 0.00 0.00 0.00 0.00 00 .00 0.00 0. 0.00 0.00 Ovehead

-Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.00 834.65 844.84 857.50 872.34 887.85 Depnciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2 Seling,GeneralandAdministrative StandardSG&A 1205 124.4 127.4 129.9 132.4 252.8 256.9 260.4 264.4 269.0 272.8 276.1 280.2 285.0 290.0 R&D 134 13.8 14.2 14.4 14.7 28.1 28.5 289 294 29.9 30.3 30.7 31.1 31.7 32.2 Product Conversion Expense- 8.8 12.3 14.1 0.7 - - - - - - - Profit Before Tx 66.1 68.2 61.0 58.8 58.4 130.4 133.4 135.3 137.3 139.6 141.5 143.0 145.0 147.4 150.0 Taxes 25.1 25.9 23.2 22.4 22.2 49.6 50.7 51.4 52.2 53.1 53.8 54.4 55.1 56.0 57.0 Nt Income Before Fiancing 41.0 42.3 37.8 36.5 36.2 80.9 82.7 83.9 85.1 86.6 87.7 88.7 89.9 91.4 93.0

Nt Income 41.0 42.3 37.8 36.5 36.2 80.9 82.7 83.9 85.1 86.6 87.7 88.7 89.9 91.4 93.0 Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2 Change inWoring Capital- (6.6) (5.2) (4.4) (4.3) (209.5) (7.1) (6.0) (7.0) (8.0) (6.6) (5.7) (7.1) (8.4) (8.8) Cash Flows frm Operations 82.5 78.4 76.5 76.8 77.5 (7.6) 198.4 202.3 204.5 207.2 211.7 215.2 217.1 219.7 223.4

Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) Conversion Capital Expendites - - (83.2) (116.5) (133.1) Cash Used I Investent (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) NetCash Fow 22.2 16.3 (70.4) (104.6) (121.8) (149.6) 54.3 56.3 56.3 56.2 58.5 60.0 59.5 59.3 60.1 Teminal Value 751.6 Present ValueFactor 1.000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (60.4) (83.1) (89.5) (101.9) 34.2 32.9 30.4 28.2 27.1 25.8 23.6 21.8 276.7 Industry Valu (Net Present Value) S 203Figure 14:StandardLevel 1,Business Scenario 3, Standard

STANDARD CASE SCENARIO Ba«eYOer Announce Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales :S56 8.83 904 9.204 1 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03 Revenues 133933 1381.29 1414.78 144301 1470.39 1550.31 15 73.9 7 1594.73 1619.67 1649.29 1674.18 169613 1723.11 1754.3 1786.64 CostofSales I Labor 91.67 94.52 96.78 98.69 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.42 118.54 120.71 Material 592.12 610.55 .625.39 637.90 650.06 698.79 709.51 718.97 730.21 743.53 754.72 764.58 776.72 790.80 805.3 Ovcrhead

-Fixed 0.00 0 .00 .0 0.0 0 0.00 0.0 : 0.0 .00 0.0 0.00 0.00 0.000 0 o.o . 0.01 O. Overhead

-Vanable 414.03 427.15 437.49 446.22 454.65 469.59 476.64 482.89 490.43 499.41 506.96 513.63 521.81 531.28 541.01 Depreciation 41.5 42.8 43.9 44.7 45.6 469 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0 Selling General and Administrative Standard SG&A 120.5 124.3 1273 129.9 132.3 139.5 141.7 143.5 145.8 1484 150.7 152.7 155.1 157.9 160.8 R&D 13.4 13.8 14.1 14.4 14.7 15.5 15.7 159 16.2 16.5 16.7 17.0 17.2 17.5 17.9 Product Conversion Expense

- - 1.5 2.1 2.4 0.1

- - - - - - Profit Before Tax 66.1 68.1 68.3 69.1 70.1 75.2 76.5 77.5 78.8 80.2 81.4 82.5 83.8 85.3 86.9 Taxes 25.1 25.9 25.9 26.2 26.6 28.6 29.1 29.5 29.9 30.5 30.9 31.3 31.8 32.4 33.0 NetIncome BeforeFinancing 41.0 42.2 42.3 42.8 43.5 46.7 47.4 48.1 48.8 49.7 50.5 51.1 52.0 52.9 53.9

Net Income 41.0 42.2 42.3 42.8 43.5 46.7 47.4 48.1 48.8 49.7 50.5 51.1 52.0 52.9 53.9 Depreciation 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0 Change in Working Capital

- (6.6) (5.2) (4.4) (4.3) (12.5) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.0) CahFlowsfrom Operations 82.5 78.5 81.0 831 84.8 810 91.3 93.0 93.9 949 97.2 98.9 99.8 1010 102.8 Ordinary Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (709) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) Conversion Capital Expenditrs

- - (0.4) (0.6) (0.7) CashUsedIn Investment (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) Ndt Cash Flow 22.2 16.3 16.8 17.6 17.9 13.2 22.4 23.2 23.0 22.8 23.9 24.7 24.4 24.3 24.6 Tenrinal Value 308.5 Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted CashFlow 22.2 15.1 14.4 14.0 13.2 9.0 14.1 13.6 12.4 114 11.1 10.6 97 8.9 1136 Indstry Value (NtPresent Value) S 293Figure 15: StandardLevel 2, Business Scenario 3, Standard

STANDARD CASE SCENARIO n a. Yir AnnounceYear StandardYear 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSales 8.561 8.831 :9041 9.221 9.39 9.581 9.72 9.85 10.00 10.18| 10.34 10.48 10.65 10.851 1106 Revenue 133929 1331.761 141509 1443.24 1470.6 1679.21 1704.80 1727.03 1753.82 1786.02 1813.35 1837.67 1867.65 1902.48 1938.62 Costof Sales Labor 91.66 94. 96.81 98.71 100.561 115.03 116.78 118.31 120.15 122.3 124.26 125.94 128.00 130.3 132.8 Material 592.10 610.78 625.55 638.01 650.21 754.38 765.97 775.98 787.98 802.41 814.65 825.55 839.01 854.6 870.99 Overhead

-Fied 0.00 0. 0.00 0.00 0.0 1 0.00 0.0 0 O.O 0.00 0.00 0 0.00 0.0 0.00 Overead- Vafiable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.8 563.8 574.3 585.21 Depcition 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 584 59.4 60.5 61.6 Sellng, General andAdministrative Stmadard SG&A 120.5 124.4 127.4 129.9 132.4 151.1 153.4 155.4 157.8 160.7 163.2 165.4 168.1 171.2 174.5 R&D 13.4 13.8 14.2 14.4 14.7 16.8 17.0 17.3 17,5 179 18.1 18.4 18.7 19.0 19.4 Product Conerion Expese - - 7.0 9.8 11.2 0.6

- - - - - - - - Profit Before Tax 66.1 68.2 62.8 61.4 61.3 80.9 82.7 83.7 85.0 86.6 88.0 89.2 90.6 92.3 94.1 Taxes 25.1 25.9 23.9 23.3 23.3 30.7 31.4 31.8 32.3 32.9 33.4 33.9 34.4 35.1 35.8 Net ncomeBforeFinainneg 41.0 42.3 38.9 38.1 38.0 50.1 51.3 51.9 52.7 53.7 54.5 55.3 56.2 57.3 58.4

Nt Income 41.0 42.3 38.9 38.1 38.0 50.1 51.3 51.9 52.7 53.7 54.5 55.3 56.2 57.3 58.4 Depreciation 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6 ChangeinWorking Capital - (6.6) (5.2) (4.4) (4.3) (32.6) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.5) (5.7) CshFlows from Operations 82.5 78.4 77.6 78.4 79.3 70.9 101.5 103.4 104.4 105.5 107.9 109.9 110.9 112.3 114.3 Ordinay CapitalExpenditures (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) Converion Capital Expeditures (7.8) (10.9) (12.4)

- Cash Used Innvestment (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) NetCash Flow 22.2 16.3 6.1 2.6 0.7 (3.5) 25.9 26.9 266 26.3 27.6 28.5 28.2 28.1 28.5 Terminal Value 357.2 Pst Value Fator 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 DiscountedCash Fow 22.2 15.1 5.3 2.0 0.5 (2.4) 16.4 15.7 14.4 13.2 12.8 12.2 11.2 10.3 131.5 Industry Value (NtPresent Value) S 280Figure 16: StandardLevel 3, Business Scenario 3, Standard

STANDARD CASE SCENARIO Baa va .... nnounce Year SL.andrd Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 UnitSales 8.56 8.83 9.04 9.22 9.39 958

. 9.72 9.85 10.00 10.19 1034 10.49 10.66 10.86 11.07 Revenues 1339.29 1381.76 1415.09 1443.24 1470.68 : 1869.62 1897.90 1922.63 1952.49 1988.72 2019.63 2047.32 2081.39 2120.97 2162.03 Cos of Sales

. I I Labor '91i66 94.571 .; 96.81 98.71 100.56 124:13 126.01 127.66 129.66 132.07 134.14 135.99 138:25 140.81 143.60 Material 592.10 610.78 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869:48 882.97 895.05 909.95 927.28 945.30 Overhead
-Fixed 0.00 0:00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.0 0. 0 0.00 Overhead

-Variable 414.02 427.25 437.56 446.27 454.71 572.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.44 Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 Selling Generaland Adminisrative StandardSG&A 120.5 124.4 127.4 129.9 132.4 168.3 170.8 173.0 175.7 179.0 181.8 184.3 187.3 190.9 194.6 R&D 13.4 13.8 14.2 14.4 14.7 18.7 19.0 19.2 19.5 199 20.2 20.5 20.8 21.2 21.6 Product Conversion Expense
- 3.8 5.3 6.0 0.3

- - Profit Before Ta 66.1 68.2 66.0 65.9 66.5 93.1 94.8 96.0 97.5 99.3 100.9 102.3 104.1 106.1 108.2 Taxes 25.1 25.9 25.1 25.1 25.3 35.4 36.0 36.5 37.0 37.7 38.3 38.9 39.5 40.3 41.1 Netncome Before Finacing 41.0 42.3 40.9 40.9 41.3 57.7 58.8 59.5 60.4 61.6 62.6 63.4 64.5 65.8 67.1

Net Income 41.0 42.3 40.9 40.9 41.3 57.7 58.8 59.5 60.4 61.6 62.6 63.4 64.5 65.8 67.1 Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 Change inWoking Capital
- (6.6) (5.2) (4.4) (4.3) (62.4) (4.4) (3.9) (4.7) (5.7) (4.8) (4.3) (5.3) (6.2) (6.4) Cash Flowsfrom Operations 82.5 78.4 79.6 81.2 82.5 709 131.2 133.5 134.8 1364 1394 141.9 143.3 1453 148.0 Ordinay Capital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) Conversion CapitalExpenditures - (32.6) (45.7) (52.2) ---- CashUsed InInvestmen (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) Net

Cash Flow 22.2 16.3 (16.7) (29.4) (35.8) (25.7) 33.0 34.1 33.8 33.6 35.1 36.1 35.9 35.8 36.5 Terminal Value 456.5 PesentValue Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (14.3) (23.3) (26.3) (17.5) 20.8 19.9 18.3 16.8 16.3 15.5 14.3 13.2 168.1 Industy Value (NetPesent Value) S 259Figure 17: Standard Level 4, Business Scenario 3, Standard

STANDARD CASE SCENARIO Bs. Y.r Announc.Y*T Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 ::9.04 9.22 9.39 9.58 9.72 9.85

. 10.00 10.1 10.33 10.46 10.63 10. 11:01 Revenues 1339-29 1381.76 1415.09 1443.24 : 1470.681 2617.45 7 2659.79 2695.59 2737.08 2784.82 2824.02 2858.25 2900.77 2950.65 3002.96 CostoSales
. I : . _ . . Labor 91.66 94.57. 96.81 98.71 100.561 150.861 153.24 155.29 157.71 160:501 162.82 164.84 167.34 170.24 173.25 Material 592.10 610.78 625.55 638.01 650.21 1219.81 1239.79 1256.59 1275.93 1298:08 1316.22 1332.06 1351.74 1374.85 1399.18 Overhead

-Fixed 0.00 .0.00 0.00 0.00 0.00 0.0 0. 0.00 0.00 0.00 0.00 0.00 0.00 000 0.00 Overhead

-Variable 414.02 427.25 437.56 446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 878.79 Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 1083 109.7 111.4 113.4 115.4 Sellig,GeneralandAdminstrative Standard SG&A 120.5 124.4 127.4 129.9 132.4 235.6 239.4 242.6 2463 250.6 254.2 257.2 261.1 265.6 270.3 R&D 13.4 13.8 14.2 14. 14.7 26.2 26.6 27.0 27.4 27.8 28.2 28.6 29.0 29.5 30.0 Product Conversion Epense-

- 6.3 8.8 10.1 0.5 - - - - - Profit fore Tax 66.1 68.2 63.5 62.4 62.4 118.3 120.9 122.6 124.4 126.5 128.2 129.7 131.5 133.7 136.0 Taxes 25.1 25.9 24.1 23.7 23.7 45.0 45.9 46.6 47.3 48.1 48.7 49.3 50.0 50.8 51.7 NetIcomeBefore Financig 41.0 42.3 39.4 38.7 38.7 73.4 75.0 76.0 77.1 78.4 79.5 80.4 81.5 82.9 84.3

Net Income 41.0 42.3 39.4 38,7 38.7 73.4 75.0 76.0 77.1 78.4 795 80.4 81.5 82.9 84.3 Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4 Change in Workig Capital- (6.6) (5.2) (4.4) (4.3) (179.5) (6.6) (5.6) (6.5) (7.5) (6.1) (5.4) (6.7) (7.8) (8.2) Cash Flows from Operations 82.5 78.4 78.0 79.0 80.0 (5.8) 170.2 173.6 175.4 177.7 181.6 184.7 186.3 188.5 191.6 Ordinary Capital Erpenditures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6) Conversion CapitalExpenditres (60.1) (84.2) (96.2) - Cash Used InInvestmnt (60.3) (62.2) (123.8) (149.2) (1624) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6) Net Cash Flow 22.2 16.3 (45.8) (70.2) (82.4) (127.1) 47,0 48.8 48.7 48.7 50.7 52.1 51.6 51.3 52.0 Terinal Value 650.4 PrsentValue Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (39.3) (55.7) (60.6) (86.5) 29.6 28.5 26.3 24.4 23.5 22.4 20.5 18.9 239.5 Industry Value (Net PresentValue) S 229Figure 18: StandardLevel 1,Business Scenario 1, Cumulative
i 'ii iii i i i i r ii r iii ] ii

STANDARO CASE SCENARIO .. Bae Yar Announce Y..r Standard Y.ar

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales -8.56 8.83 9.04 9.22 9.39 : 9.58 :9.72 9.85 1. 10.019 10.341 0.48 0. 10. 0.84 11.03 Revenues 133933 1381.29 1414.78 1443.01 :1470.39 1748.23 1775.11 1798.54 1826.591 1859.81 1887.81 1912.45 1942:78 1977.98 2014.43 CostofSales_

_ '
. Labor 91.67 94.52 96.78 98.69 100.53 105:61 107.21 108.63 110.35 112.39 114.10 115:61 117.46 119.60 121.80 Material 592.12 610.55 625.39 637.90 650.06 829.95 842.87 854.03 867.32 883.07 896.28 907.92 922.29 938.97 956.32 Overead

-Fixed 0.00( 0.00 : 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.0 0.00 Overhad- Variable 414.03 427.15 437.49 446.22 454.65 477.67 484.88 491.24 498.91 508.03 515.70 522.47 530.78 540.41 550.32 Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 Selling,General andArministrative Standard SG&A 120.5 124.3 127.3 129.9 132.3 157.3 159.8 161.9 164.4 167.4 169.9 172.1 174.9 178.0 181.3 R&D 13.4 13.8 14.1 14.4 14.7 17.5 17.8 18.0 18.3 18.6 18.9 19.1 19.4 19.8 20.1 Product Conversion Expense

- - 4.1 5.7 6.5 0.3

- - - - - Profit Before Tax 66.1 68.1 65.7 65.5 66.0 92.0 93.8 95.0 96.5 98.3 99.7 101.0 102.6 104.5 106.4 Taxes 25.1 25.9 25.0 24.9 25.1 35.0 35.6 36.1 36.7 37.3 37.9 38.4 39.0 39.7 40.4 Net Income Before Fincing 41.0 42.2 40.7 40.6 40.9 57.0 58.1 58.9 59.8 60.9 61.8 62.6 63.6 64.8 66.0

Net Income 41.0 42.2 40.7 40.6 40.9 57.0 58.1 58.9 59.8 60.9 61.8 62.6 63.6 64.8 66.0 Depreciation 41.5 42.8 43.9 44.7 45.6 67.8 68.9 69.8 70.8 72.1 73.2 74.2 75.4 76.7 78.1 Changei Working Capital (6.6) (5.2) (4.4) (4.3) (43.5) (4.2) (3.7) (4.4) (5.2) (4.4) (3.9) (4.7) (5.5) (5.7) Cash Flows fromOperations 82.5 78.5 79.4 80.9 82.2 81.4 122.8 125.0 126.3 127.8 130.7 133.0 134.2 136.0 138.4 Ordinay Capital Expnditues (60.3) (62.2) (63.7) (64.9) (66.2) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3) Conversion Capital Expenditures (23.8) (33.4) (38.2) ---- - Cash UsedInIvestment (60.3) (62.2) (87.5) (98.3) (104.3) (88.8) (90.2) (91.4) (92.8) (94.5) (95.9) (97.1) (98.7) (100.5) (102.3) NetCashFlow 22.2 16.3 (8.2) (17.4) (22.1) (7.4) 32.6 33.7 33.5 33.4 34.8 35.8 35.6 35.5 36.1 Terminal Valu 451.8 PresentValue Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discouned Cash Flow 22.2 15.1 (7.0) (13.8) (16.2) (5.1) 20.6 19.7 18.1 16.7 16.1 15.4 14.1 13.1 166.3 IndustyValue (Ne Present Valu) S 295Figure 19: StandardLevel 2, Business Scenario 1,Cumulative

STANDARD CASE SCENARIO B .se Year Announc. Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 8.83 9.04 9.22 9.391 9.58 9.721 9.85 10.00 10.18 10.34 10.48 10.65 10.85 11.06 Revenues 339.29 1381.76 1415.09 : 1443:24 1470.68 1881.22 1910.061 1934.96 1964.88 2000.82 2031.31 2058.43 2091.91 2130.99 2171.6 Cost

ofSales · ' s Labor 91.66 9457 96.8 8.71 1 00.561 115.99 117.76 119.30 121.16 123.39 125.29 126.98 129.06 131.47 133.97 Material 592.10 610.78 625.55 638.01 650.21 886.30 900.00 911.75 925.80 942.68 956.98 969.71 985.49 1003.89 1023.12 Overhead- Fixed 0. 00 0

.. 0.00 o 000 0.00 000 0.00 0.00 0.o 0.00 0.00 Overhead -Variable 414.02 427.25 437.56 446.27 454.71 515.23 523.01 529.82 538.0 547.94 556.33 563.8 72.9 83.66 594 Depreciation 41.5 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2 Selling. GeneralandAdmminsrative Standard SG&A 120.5 124.4 127.4 129.9 132.4 169.3 1719 174.1 176.8 180.1 182.8 185.3 188.3 191.8 195.4 R&D 13.4 13.8 14.2 144 14.7 18.8 19.1 19.3 19.6 20.0 20.3 20.6 20.9 21.3 21.7 Product Conversion Expense - - 9.6 13.4 15.4 0.8 --- - Profit BeforeTax 66.1 68.2 60.2 57.7 57.2 100.0 102.4 103.7 1053 107.2 108.8 110.3 112.1 114.2 116.4
Taxes 25.1 25.9 22.9 21.9 21.7 38.0 38.9 39.4 40.0 40.7 41.4 41.9 42.6 43.4 44.2 Net Income Before Finncing 41.0 42.3 37.3 35.8 35.5 62.0 63.5 64.3 65.3 66.5 67.5 68.4 69.5 70.8 722

NetIncome 41.0 42.3 37.3 35.8 35.5 62.0 63.5 64.3 65.3 66.5 67.5 68.4 69.5 70.8 72.2 Depreciation 415 42.8 43.9 44.7 45.6 74.8 75.9 76.9 78.1 79.5 80.8 81.8 83.1 84.6 86.2 Change inWoring Capital - (6.6) (5.2) (4.4) (4.3) (64.2) (4.5) (3.9) (4.7) (5.6) (4.8) (4.2) (5.2) (6.1) (6.4) CashFlows from Operation 82.5 78.4 76.0 76.1 76.7 72.5 134.9 137.3 138.7 140.4 143.4 145.9 147.4 149.4 152.1 Onrinmry CapitalExpenditurs (60.3) (62.2) (63.7) (64.9) (66.2) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) Conversion Capital Expedics - - (31.6) (44.3) (50.6) Cash Used InInvestment (60.3) (62.2) (95.3) (109.2) (116.8) (95.8) (97.2) (98.5) (100.0) (101.9) (103.4) (104.8) (106.4) (108.4) (110.4) NetCash Flow 22.2 16.3 (19.3) (33.1) (40.0) (23.2) 37.6 38.8 38.7 38.5 40.0 41.2 40.9 41.0 41.7 Termial Value 521.5 Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 (16.6) (26.3) (29.4) (15.8) 23.7 22.7 20.9 19.3 18.6 17.7 16.3 15.1 192.0 Industry Value (Net PresentValue) S 295Figure 20: StandardLevel 3, Business Scenario 1, Cumulative

STANDARD CASE SCENARIO BaseYl Announce Ye.r Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 85 8. 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.66 10.86 11:07 Rveonus 133929 1381.76 1415.09 1443.24 :1470.68 2077.18 : 2108.71 2136.12 2169.16 2209.23 2243.42 2274.03 2311.84 2355.90 2401.7 CostofSales ' : Labor 9166 9 96.81 9 98.71 100.56 125.10

. 127.00 128.66 130.67 133.11 135.18 137.05 139.33 141.98 144.7 Matrial 592.10 610.78 625.55 638.01 650.21 950.06 964.56 977.09 992.15 1010.42 1025.99 1039.95 1057.24 1077.42 1098.48 Overhead

-Fixed 0.00 0.O0 0.00 0.00 0.00 0.00 0.00 0.00 .0 0.00.00 0.00 0.00 0.00 Overhead-Variable 414.02 427.25 437.56 446.27 454.71 580.41 589.15 596.81 606.08 617.32 626.92 635.51 646.08 658.35 671.07 Depreiation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Selling.GeneralandAdministrative StandardSG&A 120.5 124.4 127.4 129.9 132.4 186.9 189.8 1923 195.2 198.8 201.9 204.7 208.1 2120 216.2 R&D 13.4 13.8 14.2 14.4 14.7 20.8 21.1 21.4 21.7 22.1 22.4 22.7 23.1 23.6 24.0 Product Converion Expnse - - 6.4 9.0 10.2 0.5

- - - - - Profit Before Tax 66.1 68.2 63.4 62.2 62.3 116.0 118.3 119.8 121.6 123.9 125.8 127.5 129.7 132.2 134.9
Taxes 25.1 25.9 24.1 23.6 23.7 44.1 44.9 45.5 46.2 47.1 47.8 48.5 49.3 50.2 51.2 Net Income ore Financing 41.0 42.3 39.3 38.6 38.6 71.9 73.3 74.3 75.4 76.8 78.0 79.1 80.4 82.0 83.6

NetInome 41.0 42.3 39.3 38.6 38.6 71.9 73.3 74.3 75.4 76.8 78.0 79.1 80.4 82.0 83.6 Depreciation 41.5 42.8 43.9 44.7 45.6 97.4 98.9 100.2 101.7 103.6 105.2 106.6 108.3 110.3 112.4 Change inWorking Capital - (6.6) (5.2) (4.4) (4.3) (94.9) (4.9) (4.3) (5.2) (6.3) (5.3) (4.8) (5.9) (6.9) (7.2) Cash Flows fom Operations 82.5 78.4 78.0 78.9 79.9 74.4 167.3 170.1 172.0 174.1 177.8 180.9 182.8 185.4 188.9

Ordinary Capital Expenditurcs (60.3) (62.2) (63.7) (64.9) (66.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) ConversionCapital Expenditures -(56.9) (79.6) (91.0) Cash UsedI Ivestment (60.3) (62.2) (120.6) (144.6) (157.2) (118.4) (120.2) (121.8) (123.6) (125.9) (127.8) (129.6) (131.6) (134.1) (136.6) NetCashFlow 22.2 16.3 (42.6) (65.7) (77.3) (44.0) 47.1 48.4 48.3 48.2 50.0 51.3 51.2 51.3 52.3 TeminalValue 654.2 Prsent Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Dscouted Cash Flow 22.2 15.1 (36.5) (52.1) (56.8) (30.0) 29.7 28.3 26.1 24.1 23.2 22.0 20.3 18.9 240.8 Industy Value (Net Present Value) S 295Figure 21: Standard Level 4, Business Scenario 1,Cumulative

lI i i ~ ' .:i:^Ster . - :, I STAIDARD CASE SCEIARIO B... Year Announce

.... Standard Y.t 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UnitSales 8.56 8.83 9.04 : 9.22 9.39 9.58 9.72 9.85 : 10.00 10.18 10.33 10.46 10.63 10.81 11.01 Revenues 1339.29 1381.76 .1415.09 1443.24 1470.68 2825.86 2871.61 2910.27 2955.02 3006.51 3048.77 3085.68 3131.54 318537 3241.86 Cost /fSs ~ Labor 91.66 .94.57 96.81 98.71 100.56 151.78 154.19 156.25 158.68 161.49M 68.36 171.28 174.31 Material 592.10 610.78 625.55 638.01 650.21 :1350.55 1372.62 1391.19 1412.58 1437.11 1457.20 1474.74 1496.54 1522.16 1549.12 Overhead

-Fixed 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 Ovehead- Variable 414.02 427.25 437.56 446.27 454.71 773.78 786.11 796.60 808.84 823.00 834.65 844.84 857.50 872.34 887.85 Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2 Selling General andAdministrative Standard SG&A 120.5 124.4 127.4 129.9 132.4 254.3 258.4 261.9 266.0 270.6 274.4 277.7 281.8 286.7 291.8 R&D 134 13.8 14.2 14.4 14.7 28.3 28.7 29.1 29.6 30.1 30.5 30.9 31.3 31.9 32.4 Product Conversion Expense-

- 8.8 12.3 14.1 0.7

- - - - ProfitBefo Tax 66.1 68.2 61.0 58.8 58.4 145.5 148.7 150.8 153.1 155.6 157.7 159.5 161.7 164.4 167.2 Taxes 25.1 25.9 23.2 22.4 22.2 55.3 56.5 57.3 58.2 59.1 59.9 60.6 61.4 62.5 63.6 Net Income Before Financing 41.0 42.3 37.8 36.5 36.2 90.2 92.2 93.5 94.9 96.5 97.8 98.9 100.2 101.9 103.7

Nelncome 41.0 42.3 37.8 36.5 36.2 90.2 92.2 93.5 94.9 96.5 97.8 98.9 100.2 101.9 103.7 Depreciation 41.5 42.8 43.9 44.7 45.6 121.0 122.8 124.4 126.3 128.6 130.5 132.2 134.3 136.7 139.2 Change in Working Capital (6.6) (5.2) (4.4) (4.3) (212.1) (7.2) (6.0) (7.0) (8.1) (6.6) (5.8) (7.2) (84) (8.8) Cash Flows fromOperation 82.5 78.4 76.5 76.8 77.5 (0.9) 207.8 211.8 214.2 217.1 221.7 225.3 227.4 230.2 234.0 OdinaryCapital Expenditures (60.3) (62.2) (63.7) (64.9) (66.2) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) Conversion Capital Expnditures - (83.2) (116.5) (133.1) CashUsedn Innvetment (60.3) (62.2) (146.9) (181.4) (199.3) (142.0) (144.1) (146.0) (148.3) (150.9) (153.2) (155.2) (157.6) (160.4) (163.3) NetCashFlow 22.2 16.3 (70.4) (104.6) (121.8) (142.9) 63.7 65.9 66.0 66.1 68.5 70.1 69.8 69.7 70.7 TelminlValue 884.5 Present Value Fctor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Dicounted Cash Flow 22.2 15.1 (60.4) (83.1) (89.5) (97.3) 40.2 38.5 35.7 33.1 31.8 30.1 27.7 25.7 325.6 Industry Value (NetPresetValue) S 295Figure22: StandardLevel 1,Business Scenario 1, Standard

IMR i&i.EWtterfla0,il2S21 j j STANDARD CASE SCENARIO Base Y.ea AnnounceYear StandardYar 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales 8.56 .08.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.48 10.64 10.84 11.03 Revenuecs 1339.33 1381:29 1414.78 .1443.01 1470.39 1550.66 1574.33 1595.09 1620.04 1649.67 1674.56 1696.52 1723.50 1754.77 1787.05 Cost

ofSales

. Labor 91.67 94:52 96.7818 98.69 100.53 104.67 106.25 107.66 109.36 111.38 113.08 114.58 116.42 118.54 120.71 Material 592.12 610.55 6625.39 637.90 650.06 698.79 709.58 718.9 730.21 743.53 754.72 764.58 776.72 790.80 805.39 Overhead

-Fixed 0.00 0.00 0.00 0 .00 0.00 0.0 0.00 0.00 0.00 0.0 0.00 .0.0 0.0 0.00 0.00 Overhead- Variable 414.03 427.15 437.49 446.22 454.65 469.59 47664 482.89 490.43 499.41 506.96 513.63 521.81 531.2 541.01 Depreciation 41.5 42.8 439 44.7 45.6 469 476 482 48.9 498 50.6 51.2 52.1 53.0 540 Selling. GeneralandAdninistraive StandardSG&A 120.5 124.3 127.3 129.9 132.3 139.6 141.7 143.6 145.8 148.5 150.7 152.7 155.1 157.9 160.8 R&D 13.4 13.8 14.1 14.4 14.7 15.5 15.7 16.0 16.2 16.5 16.7 17.0 17.2 17.5 17.9 Product Conversion Expense

- 5 2.1 2.4 0.1

- - - ProfitBefore Tax 66.1 68.1 68.3 69.1 70.1 75.6 76.8 77.9 79.1 80.5 81.8 82.8 84.1 85.7 87.3 Taxes 25.1 25.9 25.9 26.2 26.6 28.7 29.2 29.6 301 30.6 31.1 31.5 32.0 32.6 33.2 NetIncome BeforeFinancing 41.0 42.2 42.3 42.8 43.5 46.9 47.6 48.3 49.0 49.9 50.7 51.4 52.2 53.1 54.1

Net Income 41.0 42.2 42.3 42.8 43.5 46.9 47.6 48.3 49.0 49.9 50.7 51.4 52.2 53.1 54.1 Depreciation 41.5 42.8 43.9 44.7 45.6 46.9 47.6 48.2 48.9 49.8 50.6 51.2 52.1 53.0 54.0 ChangeinWorking Capital

- (6.6) (5.2) (4.4) (4.3) (126) (3.7) (3.2) (3.9) (4.6) (3.9) (3.4) (4.2) (4.9) (5.1) CashFlows from Opations 82.5 785 81.0 83.1 84.8 81.1 91.5 93.2 94.1 95.1 97.4 99.2 100.0 101.2 103.0 Ordinary Capital Expenditurs (603) (62.2) (63.7) (64.9) (66.2) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) Conversion Capital Expenditures

- - (0.4) (0.6) (0.7) CashUsed Ininvestent (60.3) (62.2) (64.1) (65.5) (66.9) (67.9) (68.9) (69.8) (70.9) (72.2) (73.2) (74.2) (75.4) (76.7) (78.1) Net Cash Flow 22.2 16.3 16.8 17.6 17.9 13.3 22.6 23.4 23.2 23.0 24.1 25.0 24.6 24.5 24.9 Terminal Value 311.3 Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted Cash Flow 22.2 15.1 14.4 14.0 13.2 9.1 14.3 13.7 12.5 11.5 11.2 10.7 9.8 9.0 114.6 Industry Value (Net Present Value) S 295Figure 23: Standard Level 2, Business Scenario 1,Standard

STANDARD CASE SCENARIO Sas. Y.er Announce Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sale 8.6 8;83 9.04 : .9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.34 10.48 1065 10.85 11.06 Revenues 1339.29 1381.76 1415.09 :1443.24 1470.68 1681.90 1707.53 1729.80 1756.63 1788.8 8 1816.26 1840.62 1870.64: 1905.53 1941.73 Cost

of

Sales

. _ I Labor 91.66 94.7 96.811 98.71 100.56 115.03 116.781 118.31 120.151 122.37 124:26 125.94 128.00 130.39 13286 Material 592.101 610.78 625.55 638.01 650.21 754.38 765.97 775.98 787.98 802.41 814.65 825.55 839.01 854.67 87099 Overhead -Fied '0.00 0.00 ' 0.00 0.0 0.00 0.00 0 0.00 0 .00 0.0 0.00 0.00 0.00 0.00 0.00 Overhead

-Vriable 414.02 427.25 437.56 446.27 454.71 507.01 514.64 521.33 529.44 539.19 547.46 554.83 563.87 574.37 585.21 Depreciation 41.5 42.8 43.9 447 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6 Selling. GeneralandAdministratve Standard SG&A 120.5 124.4 127.4 129.9 132.4 151.4 153.7 155.7 158.1 161.0 163.5 165.7 168.4 171.5 174.8 R&D 13.4 138 142 14.4 14.7 16.8 17.1 17.3 17.6 17.9 18.2 18.4 18.7 19.1 19.4 Product Conversion Expense - - 7.0 9.8 11.2 06

- Profit Before Tax 66.1 68.2 62.8 61.4 61.3 83.3 85.1 86.2 87.6 89.2 90.6 91.8 93.3 95.1 96.9 Taxes 25.1 25.9 23.9 23.3 23.3 31.6 32.4 32.8 33.3 33.9 34.4 34.9 35.5 36.1 36.8 Net IncomeBefore Finncing 41.0 42.3 38.9 38.1 38.0 51.6 52.8 53.5 54.3 55.3 56.2 56.9 57.9 59.0 60.1

NetIncome 41.0 42.3 38.9 38.1 38.0 51.6 52.8 53.5 54.3 553 56.2 56.9 57.9 59.0 60.1 Depreciation 41.5 42.8 43.9 44.7 45.6 53.4 54.3 55.0 55.8 56.8 57.7 58.4 59.4 60.5 61.6 Changeit WorkingCapital - (6.6) (5.2) (4.4) (4.3) (33.1) (4.0) (3.5) (4.2) (5.0) (4.3) (3.8) (4.7) (5.5) (5.7) CashFlows fromOpertions 82.5 78.4 77.6 78.4 79.3 72.0 103.0 104.9 105.9 107.1 109.6 111.5 112.5 113.9 116.0 OrdinaryCapital Ependitres (60.3) (62.2) (63.7) (64.9) (66.2) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) Conversion Capital Expenditures - - (7.8) (10.9) (12.4) CashUsed InInvestmnt (60.3) (62.2) (71.5) (75.8) (78.6) (74.4) (75.6) (76.5) (77.7) (79.2) (80.3) (81.4) (82.7) (84.2) (85.7) NetCash Flow 22.2 16.3 6.1 2.6 0.7 (2.4) 27.5 28.4 28.2 27.9 29.2 30.1 29.8 29.8 30.3 Terminal Value 378.7 PresetValue Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Discounted CashFlow 22.2 15.1 5.3 2.0 0.5 (1.6) 17.3 16.6 15.2 14.0 13.5 12.9 11.9 11.0 139.4 Industry Value (Net Present Value) S 295Figure 24: StandardLevel 3, Business Scenario 1,Standard

STANDARD CASE SCENARIO Base Yer. Announ. Y..r Stand.rd Y.r 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Uait Sale 8.56 8.83 .9.04 :' 9.22 9.39 9.58 9.72 9.85 10.00 10.19 10.34 10.49 10.6 10.6 1 11.0 Revmues 1339.29 1381.76 1415.09 1443.24 -1470.68 1876.19 1904.57

. 192938 1959.3 1995.71 2026.73 2054.51 2088.70 2128.43 2169,63 Cost

of

Sales Labor 91.66 94.57 96.811 98.71 100.56 124.13 126.01 127.66 129.66 132.07 134.14 135.99 138.25 140.08 14360 Material 592.10 610.78 625.55 638.01 650.21 817.41 829.83 840.65 853.68 869.48 882.97 95.05 909.95 927.28 945.30 Overhead

-Fixed 0.00 :0.00 0.0000 0.0 0. 00 0.0 0 0 0.00 0.00 0.00 00. 00 0.00 0.00 Overead- Variable 414.02 427:25 437.56 446.27 454.71 572.07 580.66 588.22 597.36 608.47 617.94 626.42 636.84 648.94 661.44 Depreciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 Selling. GeneralandAdministrative Standard SG&A 120.5 124.4 127.4 129.9 132.4 168.9 171.4 173.6 176.3 179.6 182.4 184.9 188.0 191.6 195.3 R&D 13.4 13.8 14.2 144 14.7 18.8 19.0 19.3 19.6 20.0 20.3 20.5 20.9 213 21.7 Prduct ConversionExpense - 3.8 5.3 6.0 0.3 - - - - ofitBeforeTax 66.1 68.2 66.0 65.9 66.5 99.0 100.8 102.1 103.7 1056 107.3 108.8 110.6 112.8 115.0 Taxes 25. 25.9 25.1 25.1 25.3 37.6 38.3 38.8 39.4 40.1 40.8 41.3 42.0 42.9 43.7 Neat

Income Before Fincig 41.0 42.3 40.9 40.9 41.3 61.4 62.5 63.3 64.3 65.5 66.5 67.4 68.6 69.9 71.3

Net

Income 41.0 42.3 40.9 40.9 41.3 61.4 62.5 63.3 64.3 65.5 66.5 67.4 68.6 69.9 71.3 Deprciation 41.5 42.8 43.9 44.7 45.6 75.7 76.8 77.8 79.0 80.5 81.7 82.8 84.2 85.7 87.3 Change inWorking Capital - (6.6) (5.2) (4.4) (4.3) (63.5) (4.4) (3.9) (4.7) (5.7) (4.9) (4.3) (5.4) (6.2) (6.4) CahFlows from Operatios 82.5 78.4 79.6 81.2 82.5 73.6 134.9 137.2 138.6 140.3 143.4 145.9 147.4 149.4 152.2 Ordinary Capital Expenditues (60.3) (62.2) (63.7) (64.9) (66.2) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) Conversion CapitalEpenditures - (32.6) (45.7) (52.2) CashUsed In aIvestment (60.3) (62.2) (96.3) (110.6) (118.4) (96.7) (98.1) (99.4) (101.0) (102.8) (104.4) (105.8) (107.5) (109.4) (111.5) NetCashFlow 22.2 16.3 (16.7) (29.4) (35.8) (23.1) 36.7 37.8 37.7 37.5 39.0 40.1 39.9 40.0 40.7 Terminal Value 509.3 Present Value Factor 1.0000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 DisountedCashFow 22.2 15.1 (14.3) (23.3) (26.3) (15.7) 23.2 22.1 20.4 18.8 18.1 17.2 15.9 14.7 187.5 Industy Value (Net Present Value) S 295Figure 25: Standard Level4, Business Scenario 1, Standard

ST.DAILD CASE SCENIR1O Bass. ... onnonce Year Standard Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UnitSales 8.56 8.83 9.04 9.22 9.39 9.58 9.72 9.85 10.00 10.18 10.33 10.46 10.63 10.81 11.01 Resmues 1339.2 1381.7 1415.09 1443.4 1470.68 2629.52 2672.07 2708.0 2749.71 2797.6 2837.03 2871.42 29142 2964.22 3016.78 Costo/Sales · : . ' Labor 91.66 945

. 96.S1 98.71 100.56 ,.150.86 153.24 155.29 .157.71 '160.50 162.82 :164.84 167.34 170.24 17.2 Matarial 592.10 610.75 625.55

. 636.01 650.21 1219.81 1239.79 1256.59 1275.93 1298.0 1316.22 1332.06 1351:74 1374. 1399.1 Ovehead.

-Fited 0.00 0.0 0.00 0 .00 0 0.00. 0.00.00 0.00 0.00 0.0 ---- 0 0 0.0 0.00 0.00 Overhead-Variable
. 414.02 427.2 437.56 :446.27 454.71 765.85 778.04 788.40 800.52 814.54 826.09 836.18 848.73 863.43 87S7 Depreciation 41.5 42.8 439 44.7 45.6 100.3 101. 103.2 104.8 106.7 93 0.7 111.4 113.4 115.4 Selling, GeneralandAdm6inistrativ e Stadard SG&A 120.5 1244 127.4 129.9 132.4 236.7 240.5 243.7 247.5 251.8 255.3 254 2623 266. 271.5 R&D 13.4 13.8 14.2 14.4 14.7 26.3 26.7 27.1 27.5 280 28.4 28.7 29.1 29.6 30.2 Product Conv-sion Expens - 63 8.8 10.1 0 - - - - - Pofit Before Tax 661 68.2 63.5 62.4 62.4 129.2 1319 133.8 135.8 138.1 139.9 141.5 143.5 145.9 148.4
Txes 25 2525.9 24.1 23.7 23.7 49.1 50.1 50.8 51.6 52.5 53.2 53. 54.5 55.4 56.4 Net

Income Before Fmancmg 41.0 42.3 39.4 387 38.7 S0.1 11.8 2.9 84.2 5.6 86.8 87.7 09.0 90.5 92.0

N eIncome 41.0 42.3 39.4 38.7 38.7 80.1 81.8 82.9 84.2 85.6 86.8 87.7 89.0 90.5 92.0 Depreciation 41.5 42.8 43.9 44.7 45.6 100.3 101.8 103.2 104.8 106.7 108.3 109.7 111.4 113.4 115.4 Chagei WorkingCapital - (6.6) (5.2) (4.4) (4.3) (181.4) (6.7) (5.6) (6.5) (7.5) (62) (5.4) (6.7) (78) (.2) Cash FlowsfromOperations 82.5 78.4 78.0 79.0 80.0 (0.9) 177.0 180.5 182.5 184.8 188.9 192.0 193.7 196.0 199.2 OrdinaryCapital Ependitures (60.3) (62.2) (63.7) (64.9) (66.2) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6) Conversion Capital Expendies - - (60.1) (84.2) (96.2) - Cash Used Innvestment (60.3) (62.2) (123.8) (149.2) (162.4) (121.3) (123.2) (124.8) (126.7) (129.0) (130.9) (132.6) (134.7) (137.1) (139.6)
NetCshFlo 22.2 16.3 (45.8) (70.2) (82.4) (122.2) 53.8 55.7 55.8 55.8 57.9 59.4 59.0 58.9 596 746.4 Terminal Value3 03976 0.3681 0.3409 PrsntVaue Factor 10000 0.9260 0.8575 0.7941 0.7353 0.6809 0.6305 0.5839 0.5407 0.5007 0.4636 0.4293 0.3976 0.3681 0.3409 Disonted CashFlow 22.2 15.1 (39.3) (55.7) (60.6) (83.2) 33.9 32.5 30.1 27.9 26.9 255 23.4 217 2748 Industry Value(Net Present Value) S 295