G-1

APPENDIX G: GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

G.1 INTRODUCTION AND PURPOSE

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

of various efficiency regulations and other regulations on manufacturers. The basic mode of analysis is to

determine the change invalue of the manufacturers(s) following a regulation or a series ofregulations.The

model structure also allows ananalysis ofmultiple products with regulations taking effect over a period of

time, and of multiple regulations on the same product.

Industryvalue is defined,forthe purposes ofthis analysis asthe present value of cash flowsforthe

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 a wholesaler) and then

selecting user-defined regulatory levels. The model calculates the actual cash flows by year and then

determines the present value of those cash flows both without regulations (the pre-regulation base case)

and with regulations (the post-regulation standards case).

Output comesfromthe modelinterms ofsummarystatistics, graphs ofmajor variables, and, when

appropriate, access to the complete cash flow calculation.

G.2 MODEL DESCRIPTION

The basic structure ofthe GRIM is a standard annual cashflowanalysis that uses price and volume

information as an input, builds on fundamental base cost information, and accepts a set of regulatory

conditions as changesincosts and investments. The cash flow analysis isseparated into two major blocks:

income and cashflow. The income calculationdeterminesthe profit aftertaxes but before financialcharges.

The cash flow calculation converts profit after taxes into an annual cash flow by including investment and

non-cash items. Below are definitions of listed items onthe printout ofthe output sheet. (see Section G.3)

(1) Income Statement: Overall calculation of Net Income 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 of

distribution (distributor, retailer, etc.) 

(3) Unit Sales: Annual shipments for the industry obtained from the National

Energy Savings Spreadsheet. 

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(4) Revenues: Annual revenues; computed by multiplying Price/Unit (2) by

Unit Sales (3). 

(5) Base Costs: Costs per unit prior to regulations.

(6) New Costs: Costs per unit following regulations.

(7) Labor: Factory direct labor and fringe benefit costs; 

(8) Material: Purchased materials and components; 

(9) Overhead: Factory overhead excluding depreciation. Overhead is treated

as both fixed and variable, with the percentage of overhead

(excluding depreciation) that is variable set under the Major

Assumptions. 

(10) Depreciation: Annual depreciation on pre-regulation assets; computed as a

percentage of Revenues (4). Annual depreciation on postregulation assets is computed by dividing Conversion Capital

Expenditures (25) by a useful life from Major Assumptions.

For post-regulation years, Depreciation is the sum of

depreciation on pre- and post-regulation assets.

Pre-regulation: 

Depreciation = % of annual revenues

Post-regulation:

New Depreciation = New % of annual revenues based on

(Depreciation_Pre-regulation +

(Conversion Capital Exp./Useful_ life))

(11) Cost of Sales: Total cost of sales, computed by adding Labor (7), Material

(8), Overhead (9) and Depreciation (10).

(12) SG&A: Selling, general and administrative costs are computed as a

percentage of Revenues (4).

(13) R&D: Research and development costs unrelated to regulations;

computed as a percentage of Revenues (4). 

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(14) Product Conversion: Expensable costs related to meeting a regulation, 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 allocates these costs over a

number of years.

 (15) Profit Before Tax: Profit before taxes and any financing costs; computed by

subtracting Cost of Sales (11), SG&A (12), R&D (13), and

Product Conversion (14) from Revenues (4).

(16) Taxes: Taxes on Profits Before Tax; computed by multiplying the tax

rate contained in Major Assumptions by Profit Before Tax

(15).

(17) Net Income Before Profits after taxes; computed by subtracting Taxes

Financing: from Profit Before Tax (15).

(18) Cash Flow Statement: Overall assessment including net income, other cash related

items and adjustments and investments.

(19) Net Income: Net income; identical to Net Income Before Financing (17).

(20) Depreciation: Depreciation is a non-cash cost and is added back into Net

Income (19) as part of the cash flow calculation; identical to

Depreciation (10).

(21) Change in Working Capital: Additional accounts receivable, inventory, and other cash

investments necessary to support increased revenues;

computed by multiplying a percentage from Major Assumptions

by the change in Revenues (4).

(22) Cash Flow from Operations: The cash flow from operating activities; computed by adding

Net Income (19), Depreciation (20) and subtracting

Change in Working Capital (21).

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(23) Capital Expenditures: Investment to maintain and replace existing production assets;

computed as a percentage of Revenues (4) using a percentage

contained in Major Assumptions. Post-regulation capital

expenditures equal pre-regulation expenditures plus

depreciation on Conversion Capital Expenditures (24).

Pre-regulation: 

Capital Exp. = % of annual revenues

Post-regulation:

New Capital Exp. = New % of revenues based on (Capital

Exp._Pre-regulation + (Conversion Capital Exp./Useful_ life))

(24) Conversion Capital Exp.: Capital costs for meeting regulations, typically including plant,

equipment, tooling and the like.

(25) Cash Used in Investments: Cash required for assets; computed by adding Capital

Expenditures (23) and Conversion Capital Expenditures

(24).

(26) Net Cash Flow: Annual cash flow from operations and investments; computed

by subtracting Cash Used in Investments (25) from Cash

Flow from Operations (22).

(27) Post-Regulation Value: Value of the relevant industry following adoption and

implementation of the regulatory scenario; the present value of

the annual Net Cash Flow (26) from the base year to the year

2012, plus a terminal value based on the final year’s cash flow

valued as an annuity, are computed by model and listed. The

discounted rate for the present value is the “Discount Rate for

NPV” contained in Major Assumptions. Pre-regulation value is

computed in a similar way using base case Net Cash

Flows(26) and terminal value.

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Clothes Washers

Base Year

Announce 

Year

Standard 

Year

1998 1999 2000 2001 2002 2003 2004

(1) Income Statement

(2) Price/Unit 285.9 285.9 285.9 285.9 285.9 285.9 285.9

(3) Unit Sales 7.07 7.22 7.37 7.53 7.69 7.86 8.03

(4) Revenues 2,020.1 2,063.5 2,107.9 2,153.2 2,199.5 2,246.8 2,295.1

(11) Cost of Sales

(7) Labor 207.0 211.5 216.0 220.7 225.4 230.3 235.2

(8) Material 1,050.7 1,073.3 1,096.3 1,119.9 1,144.0 1,168.6 1,193.7

(9) Overhead - Fixed - - - - - - -

(9) Overhead - Variable 165.7 169.3 172.9 176.6 180.4 184.3 188.2

(10) Depreciation 70.9 72.4 74.0 75.6 77.2 78.9 80.6

Selling, General and Administrative 0.035 0.035 0.035

(12) Standard SG&A 363.6 371.4 379.4 387.6 395.9 404.4 413.1

(13) R&D 36.4 37.1 37.9 38.8 39.6 40.4 41.3

(14) Product Conversion Expense - - - - - - -

(15) Profit Before Tax 125.8 128.5 131.3 134.1 137.0 139.9 142.9

(16) Taxes 53.9 55.0 56.2 57.4 58.6 59.9 61.2

(17) Net Income Before Financing 72.0 73.5 75.1 76.7 78.4 80.0 81.8

(18) Cash Flow Statement 

(19) Net Income 72.0 73.5 75.1 76.7 78.4 80.0 81.8

(20) Depreciation 70.9 72.4 74.0 75.6 77.2 78.9 80.6

(21) Change in Working Capital - (2.9) (3.0) (3.1) (3.1) (3.2) (3.3)

(22) Cash Flows from Operations 142.9 143.0 146.1 149.2 152.4 155.7 159.1

(23) Ordinary Capital Expenditures (89.5) (91.4) (93.4) (95.4) (97.4) (99.5) (101.7)

(24) Conversion Capital Expenditures - - - - - - -

(25) Cash Used In Investment (89.5) (91.4) (93.4) (95.4) (97.4) (99.5) (101.7)

(26) Net Cash Flow 53.4 51.6 52.7 53.8 55.0 56.2 57.4

Terminal Value

Present Value Factor 1.0000 0.9324 0.8694 0.8106 0.7558 0.7047 0.6571

Discounted Cash Flow 53.4 48.1 45.8 43.6 41.6 39.6 37.7

(27) Industry Value (Net Present Value) $ 905.8

G.3 SAMPLE INCOME STATEMENT

SAMPLE

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