APPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

SUPPORTING DOCUMENTATION 

TABLE OF CONTENTS


12C.1 INTRODUCTION AND PURPOSE ................................... 12C-1


12C.2 MODEL DESCRIPTION ............................................ 12C-1


12C.3 DETAILED CASH FLOW EXAMPLE ................................. 12C-4


12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS ....... 12C-5


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APPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

SUPPORTING DOCUMENTATION 

12C.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 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 product. 

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). 

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

and, when appropriate, the complete cash flow calculation. 

12C.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 12.C.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 manufacturer selling price at each 

kilovolt-ampere (kVA) rating by the annual shipments at the same kVA rating, summed over all 

kVA ratings; 

(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; 

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(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; 

(6) Depreciation: Annual depreciation computed as a percentage of Revenues (2). While 

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

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

Revenues (2); 

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

percentage of Revenues (2); 

(9) Product Conversion Expense: Product conversion expenses are one-time investments in 

research, development, testing, and marketing focused on making product designs comply with 

the new efficiency standard. GRIM allocates these costs over the period between the standard’s 

announcement and effective dates; 

(10) Stranded Asset Writeoff: In the year the standard becomes effective, a one time write-off of 

stranded assets is accounted for; 

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

paid and taxes; 

(12) EBIT as a Percentage of Sales: 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 (7), R&D (8), Product Conversion Expense (9), Stranded Asset 

Writeoff (10), and Taxes (13) from Revenues (2). 

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

(16) Depreciation repeated: Depreciation is added back in the Statement of Cash Flows because 

it is a non-cash expense; 

(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 

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items such as a Depreciation (16), and subtracting out 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) Conversion Capital Expenditures: Conversion capital expenditures are one-time 

investments in property, plant, and equipment to adapt or change existing production facilities so 

that new product designs can be fabricated and assembled under the new regulation; 

(21) Cash Used in Investment: Total investments in property, plant, and equipment are 

computed by adding Ordinary Capital Expenditures (19) and Conversion Capital Expenditures 

(20); 

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

subtracting Cash Used in Investment (21) from Cash Flow from Operations (18); 

(23) Terminal Value: Estimate of the continuing value of the industry after 2038. Computed by 

growing the Free Cash Flow in year 2038 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 2038 the discounted cash flow includes the discounted Terminal Value (23); and 

(26) Industry Net Present Value: The sum of Discounted Cash Flows (25). 

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12C.3 DETAILED CASH FLOW EXAMPLE


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12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS 

The following user-instructions are contained on the “Welcome” sheet of the distribution 

transformer GRIM: 

1. The red-tabbed sheets pertain to overview information. The pink-tabbed sheets refer to 

input information. The green-tabbed sheets represent calculations. The blue-tabbed sheets 

contain numerical and graphical output. 

2. Pink cells designate input information. Green cells designate intermediate calculations. 

3. By clicking on sheet names in column B of the "Index" sheet, the workbook can be 

quickly navigated. 

4. Use the "Major Assumptions" sheet to choose the desired scenario. Cell B3 is used to 

choose the superclass. Cell B6 is used to choose the trial standard level (TSL). Cell B7 

allows toggling between TSLs 1 through 5 and TSLs D, C, B, A, and 6. Row 33 is used to 

select the markup scenarios. Within each superclass (LV dry-type, MV dry-type, and 

Liquid-Immersed), the markup scenario should be chosen consistently. Markup Scenario 1 

is the "Preservation of Gross Margin Percentage Scenario." Markup Scenario 2 is the 

"Preservation of Operating Profit Scenario." See Chapter 12 of the Technical Support 

Document for more information. 

5. After selecting the desired scenario, go to the blue-tabbed sheet entitled "Summary 

Report." Rows 16-18 summarize the impact on Industry Net Present Value (INPV). 

6. Other blue-tabbed sheets provide graphical information summarizing the scenario. Note, 

on some computers, the workbook may need to be closed and re-opened before the 

graphical information will completely update. 

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