13B-i 

APPENDIX 13B GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

OVERVIEW

TABLE OF CONTENTS

13B.1 INTRODUCTION AND PURPOSE .................................................................................. 1

13B.2 MODEL DESCRIPTION ................................................................................................... 1

13B.3 DETAILED CASH FLOW EXAMPLE ............................................................................. 4
13B-1 

APPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

OVERVIEW

13B.1 INTRODUCTION AND PURPOSE

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

impacts of energy conservation standards and other regulations on manufacturers. The basic 

mode of analysis is to estimate the change in the value of the industry or manufacturers(s) 

following a regulation or a series of regulations. The model structure also allows an analysis of 

multiple products with regulations taking effect over a period of time, and of multiple regulations 

on the same products. 

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

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

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

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

(i.e., the standards case).

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

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

13B.2 MODEL DESCRIPTION

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

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

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

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

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

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

are definitions of listed items on the printout of the output sheet (see section 13B.3).

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

Analysis Spreadsheet;

(2) Revenues: Annual revenues - computed by multiplying products’ unit prices at each 

efficiency level by the appropriate manufacturer markup;

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

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

assembly labor up-time; 

(4) Material: The portion of COGS that includes materials; 

(5) Overhead: The portion of COGS that includes indirect labor, indirect material, energy use, 

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

in overhead, the depreciation is shown as a separate line item;
13B-2 

(6) Depreciation: The portion of overhead that includes an allowance for the total amount of 

fixed assets used to produce that one unit. Annual depreciation computed as a percentage of 

COGS. While included in overhead, the depreciation is shown as a separate line item; 

(7) Stranded Assets: In the year the standard becomes effective, a one time write-off of 

stranded assets is accounted for;

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

Revenues (2); 

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

percentage of Revenues (2); 

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

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

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

the period between the standard’s announcement and compliance dates; 

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

paid and taxes;

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

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

(13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major 

Assumptions by EBIT (11). 

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

Sold ((3) to (6)), SG&A (8), R&D (9), Product Conversion Costs (10), and Taxes (13)

from Revenues (2). 

(15) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

(16) Depreciation repeated: Depreciation and Stranded Assets are added back in the Statement 

of Cash Flows because they are non-cash expenses;

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

other cash investments necessary to support operations is calculated by multiplying 

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

(18) Cash Flow From Operations: Calculated by taking NOPAT (15), adding back non-cash 

items such as a Depreciation (16), and subtracting the Change in Working Capital (17); 

(19) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to 

maintain and replace existing production assets, computed as a percentage of Revenues (2); 

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

plant, and equipment to adapt or change existing production facilities so that new product 
13B-3 

designs can be fabricated and assembled under the new regulation; The GRIM allocates 

these costs over the period between the standard’s announcement and compliance dates;

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

adding Ordinary Capital Expenditures (19) and Capital Conversion Costs (20); 

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

subtracting Capital Investment (21) from Cash Flow from Operations (18); 

(23) Terminal Value: Estimate of the continuing value of the industry after the analysis period. 

Computed by growing the Free Cash Flow at the beginning of 2045 at a constant rate in 

perpetuity; 

(24) Present Value Factor: Factor used to calculate an estimate of the present value of an 

amount to be received in the future; 

(25) Discounted Cash Flow: Free Cash Flows (22) multiplied by the Present Value Factor 

(24). For the end of 2043, the discounted cash flow includes the discounted Terminal Value 

(23); and

(26) Industry Value thru the end of 2043: The sum of Discounted Cash Flows (25). 
13B-4 

13B.3 DETAILED CASH FLOW EXAMPLE

Standard Case Income and Cash Flow Statements

Base Year Standard Year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Unit Sales 97.155 100.083 107.479 114.365 120.568 124.378 125.884 125.095 122.565 119.071 117.024 115.500 114.917 115.842 117.967

Revenues 854.207 875.483 930.905 988.198 1,221.689 1,261.687 1,275.576 1,265.318 1,235.524 1,194.797 1,172.660 1,159.287 1,155.903 1,168.453 1,193.317

Cost of Sales

Labor 6.3% 53.635 54.971 58.460 62.071 80.399 83.032 83.946 83.271 81.310 78.630 77.173 76.293 76.070 76.896 78.532

Material 60.7% 518.319 531.236 564.946 599.845 776.971 802.409 811.243 804.718 785.770 759.869 745.790 737.285 735.133 743.114 758.927

Overhead 1.3% 11.288 11.569 12.303 13.063 16.921 17.475 17.667 17.525 17.112 16.548 16.242 16.056 16.010 16.183 16.528

Depreciation 3.1% 26.480 27.140 28.858 30.634 37.872 39.112 39.543 39.225 38.301 37.039 36.352 35.938 35.833 36.222 36.993

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

Selling, General and Administrative

Standard SG&A $ 141.8 $ 145.3 $ 154.5 $ 164.0 $ 202.8 $ 209.4 $ 211.7 $ 210.0 $ 205.1 $ 198.3 $ 194.7 $ 192.4 $ 191.9 $ 194.0 $ 198.1

R&D 3.7% 31.6 $ $ 32.4 $ 34.4 $ 36.6 $ 45.2 $ 46.7 $ 47.2 $ 46.8 $ 45.7 $ 44.2 $ 43.4 $ 42.9 $ 42.8 $ 43.2 $ 44.2

Product Conversion Costs $ - $ 14.9 $ 20.8 $ 23.8 $ 1.2 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

$ (25.9) $ (25.2) $ (25.3) $ (25.1) $ (24.5) $ (23.9) $ (23.5) $ (23.4) $ (23.4) $ (23.6) $ (24.0)

Earnings Before Interest and Taxes (EBIT) 5.2% 71.1 $ $ 58.0 $ 56.5 $ 58.2 $ 60.3 $ 63.5 $ 64.2 $ 63.7 $ 62.2 $ 60.2 $ 59.1 $ 58.4 $ 58.2 $ 58.8 $ 60.1

EBIT/Revenues 8.3% 6.6% 6.1% 5.9% 4.9% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Taxes $ 22.6 $ 18.4 $ 18.0 $ 18.5 $ 19.2 $ 20.2 $ 20.4 $ 20.3 $ 19.8 $ 19.1 $ 18.8 $ 18.6 $ 18.5 $ 18.7 $ 19.1

Net Operating Profit after Taxes (NOPAT) $ 48.5 $ 39.5 $ 38.6 $ 39.7 $ 41.1 $ 43.3 $ 43.8 $ 43.5 $ 42.4 $ 41.0 $ 40.3 $ 39.8 $ 39.7 $ 40.1 $ 41.0

NOPAT $ 48.5 $ 39.5 $ 38.6 $ 39.7 $ 41.1 $ 43.3 $ 43.8 $ 43.5 $ 42.4 $ 41.0 $ 40.3 $ 39.8 $ 39.7 $ 40.1 $ 41.0

Depreciation $ 26.5 $ 27.1 $ 28.9 $ 30.6 $ 37.9 $ 39.1 $ 39.5 $ 39.2 $ 38.3 $ 37.0 $ 36.4 $ 35.9 $ 35.8 $ 36.2 $ 37.0

Change in Working Capital 0 $ 70.9 $ (1.8) $ (4.6) $ (4.8) $ (19.4) $ (3.3) $ (1.2) $ 0.9 $ 2.5 $ 3.4 $ 1.8 $ 1.1 $ 0.3 $ (1.0) $ (2.1)

Cash Flows from Operations $ 145.9 $ 64.9 $ 62.8 $ 65.6 $ 59.6 $ 79.1 $ 82.2 $ 83.5 $ 83.2 $ 81.5 $ 78.5 $ 76.9 $ 75.8 $ 75.3 $ 75.9

Ordinary Capital Expenditures 3.2% (27.3) $ $ (28.0) $ (29.8) $ (31.6) $ (39.1) $ (40.4) $ (40.8) $ (40.5) $ (39.5) $ (38.2) $ (37.5) $ (37.1) $ (37.0) $ (37.4) $ (38.2)

Capital Conversion Costs $ - $ (7.0) $ (9.8) $ (11.2) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Capital Investments $ (27.3) $ (35.0) $ (39.6) $ (42.9) $ (39.1) $ (40.4) $ (40.8) $ (40.5) $ (39.5) $ (38.2) $ (37.5) $ (37.1) $ (37.0) $ (37.4) $ (38.2)

Free Cash Flow $ 118.5 $ 29.9 $ 23.2 $ 22.7 $ 20.5 $ 38.75 $ 41.4 $ 43.0 $ 43.7 $ 43.2 $ 40.9 $ 39.8 $ 38.8 $ 37.9 $ 37.7

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

Present Value Factor 0.000 1.000 0.931 0.867 0.807 0.752 0.700 0.652 0.607 0.565 0.526 0.490 0.456 0.425 0.395

Discounted Cash Flow $ - $ 29.87 $ 21.59 $ 19.67 $ 16.57 $ 29.12 $ 28.96 $ 28.05 $ 26.49 $ 24.41 $ 21.53 $ 19.47 $ 17.70 $ 16.10 $ 14.91

Industry Value thru 2043 $ 568.00

Cash Flow Statement 

STANDARD CASE SCENARIO

This tab computes key parameters from an income statement based on unit sales, revenues and COGS, and initial financial inputs (parameters as a % of revenue). It also computes an INPV based on a discounted cash flow model.

Industry Income Statement