APPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

TABLE OF CONTENTS 

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

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

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

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APPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

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 value of the industry or manufacturer(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). 

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 

Energy Savings 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; 

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(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, and marketing focused on making products designs comply with the 

new energy conservation standard. GRIM allocates these costs over the period between the 

standard’s announcement and effective 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 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); 

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(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 

designs can be fabricated and assembled under the new regulation; 

(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 2042. Computed 

by growing the Free Cash Flow in year 2042 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 2042 the discounted cash flow includes the discounted Terminal Value (23); and 

(26) Industry Value thru 2042: The sum of Discounted Cash Flows (25). 

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13B.3 DETAILED CASH FLOW EXAMPLE 

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