APPENDIX 12A. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

OVERVIEW

TABLE OF CONTENTS

12A.1 Introduction and Purpose ............................................................................................ 12A-1

12A.2 Model Description ...................................................................................................... 12A-1

LIST OF TABLES

Table 12A.2.1 Detailed Cash Flow Example.......................................................................... 12A-4

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APPENDIX 12A. GOVERNMENT REGULATORY IMPACT MODEL 

(GRIM) OVERVIEW

12A.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 (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.

12A.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 of the GRIM.

(1) Revenues: Annual revenues – computed by multiplying products’ unit prices at each 

efficiency level by the appropriate manufacturer markup.

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

Analysis Spreadsheet.

(3) Materials: The portion of COGS that includes materials.

(4) 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.

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

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

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

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(6) 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.

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

Revenues (1).

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

percentage of Revenues (1).

(9) 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.

(10) Stranded Assets: 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 (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 (12) are calculated by multiplying the tax rate contained in Major 

Assumptions by EBIT (12).

(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 Costs (9), and Taxes (13) from 

Revenues (1).

(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 (1).

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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. 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 2048 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 2048, the discounted cash flow includes the discounted Terminal Value 

(23).

(26) Industry Value thru the end of 2048: The sum of Discounted Cash Flows (25).

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Table 12A.2.1 Detailed Cash Flow Example

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