# N

GRIM Operating Principles

1.0 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 in value of the 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 value is defined, for the purposes of this analysis as the present value of cash flows for the 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 comes from the model in terms of summary statistics, graphs of major variables, and, when appropriate, access to the complete cash flow calculation.
2.0 Model description The basic structure of the GRIM is a standard annual cash flow analysis which uses price and volume information as an input, builds on fundamental base cost information, 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 the profit after taxes but before financial charges. 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 on the printout of the output sheet. (see Section 3.0) (1) Income Statement: Overall calculation ofNet 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, etc.), entered as an input variable by user.

I 

# )**~H**

GRIM Operating Principles

1.0 Introduction and purpose The purpose ofthe Government Regulatory Impact Model (GRIM) is to help identify the effects ofvarious efficiency regulations and other regulations on manufacturers. The basic mode ofanalysis is to determine the change in value ofthe manufacturers(s) following a regulation or a series ofregulations. The model structure also allows an analysis of multiple products with regulations taking effect overa period oftime, and ofmultiple regulations onthe sameproduct. Industry value is defmed, for the purposes ofthis analysis as the present value ofcash flows for the 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 comes from the model interms ofsummary statistics, graphs ofmajor variables, ana, when appropriate, access to the complete cash flow calculation.

2.0 Model description The basic structure ofthe GRIM is a standard annual cash flow analysis which uses price and volume information as an input, builds on fundamental base cost information, and accepts a set ofregulatory 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 the profit aftertaxes but before financial charges. The cash flow calculation converts profit after taxes into an annual cash flow by including investment and non-cash items. Below are defmitions oflisted items onthe printout ofthe output sheet. (see Section 3.0) 

### (1) IncomeStatement:

(2) PricelUnit: Overall calculation of

### NetIncomeBefore Financing (17) using revenue and costitems subject to incometax effects as described in (2) through (17). Actual manufacturer

### unit price chargedto the first level ofdistribution (distributor, etc.), entered as an input variable by user.

1(3) Unit Sales:

(4) Revenues:

(5) Base Costs:
(6) New Costs:
(7) Labor:

(8) Material:



### (9) Overhead:

(10) Depreciation: Annual shipments; entered as an input variable by user. Annual revenues; computed by multiplying Price/Unit (2) by Unit Sales (3). 

### Costs per unit prior to regulations entered as an input variable by the user. Costs per unit following regulations; computed by entering an input variable. Factory direct labor and fringe benefit costs; calculation done for and based on Base Costs (5) and New Costs (6). Purchased materials and components; calculation done for, and based on, Base Costs (5) and New Costs (6). 

### Factory overhead excluding depreciation; calculation done for, and based on, Base Costs (5) and New Costs (6). Overhead is treated as both fixed and variable, with the percentage of overhead (excluding depreciation) that is variable set under the Major Assumptions. Annual depreciation on pre-regulation assets; computed as a percentage of base yearRevenues (4). Annual depreciation on post-regulation assets is computed by dividing Capital Expenditures (24) bya useful life from Major Assumptions. For postregulation years, Depreciation is the sum of -depreciation on pre- and post-regulation assets. (11) Cost of Sales: Total cost of sales, computed by adding Labor (7), Material (8), Overhead (9) and Depreciation (10). 

### (12) R&D: Research and development costs unrelated to regulations; computed as a percentage ofRevenues (4). From Major Assumptions. (13) Product Conversion : Expensable costs related to meeting a regulation, often including product redesign costs and expensable factory conversion expenses. Also

2 

### (3) Unit Sales:
(4) 

### Revenues:
(5) 

### Base Costs:


### (6) New Costs:
(7) 

### Labor:

(8) 

### Material:

(9) 

### Overhead:

(10) 

### Depreciation:

(11) 

### Cost of Sales:
(12) 

### R&D:

(13) Product Conversion: 

### Annual shipments; entered as an input variable by user. Annual revenues; computed by multiplying Price/Unit 

### (2) by Unit Sales (3). 

### Costs perunit priorto regulations entered as an input variable by the user. Costs per unit following regulations; computed by entering an input variable. Factory direct labor and fringe benefit costs; calculation done for and based onBase Costs (5) 

### andNew Costs (6). 

### Purchased materials and components; calculation done for, and based on, Base Costs 

### (5) and New Costs (6). A 

### •



### Factory overhead excluding depreciation; calculation done for, and based on, Base Costs 

### (5) and New Costs 

### (6). Overhead is treated as both fixed and variable, with the percentage ofoverhead (excluding depreciation) that is variable set underthe Major Assumptions. Annual depreciation on pre-regulation assets; computed as a percentage ofbase yearRevenues 

### (4). Annual depreciation on post-regulation assets is computed by dividing CapitalExpenditures 

### (24) by auseful life from MajorAssumptions. For postregulationyears, Depreciation 

### is the sum of ·depreciation onpre- and post-regulation assets. Total cost ofsales, computed by adding Labor (7), 

### Material 

### (8), Overhead

### (9) and Depreciation 

### (10). Research and development costs unrelated to regulations; computed as apercentage ofRevenues 

### (4). From MajorAssumptions. Expensable costs related to meeting aregulation, often including productredesign costs and expensable factory conversion expenses. Also

2includes costs incurred for new product literature and catalogs, product obsolescence, and various related marketing expenses

. GRIM computation based on regulatory level selected by user (ONE, TWO, THREE, etc.) and allocated out for the appropriate number of years. 

### (14) SG&A:

(IS) Profit Before T :

(16) Taxes:

(17) Net Income:
(18) Cash Flow Statement:
(19) Cash Fl :


### (20) Net Income: (21) Depreciation: 

### Selling, general and administrative costs, including all non-factory costs; computed by adding R&D (12), Product Conversion (13) and standard SG&A costs, which are computed as a percentage of base yearRevenues (4). Profit before taxes and any financing costs; computed by subtracting the Cost of Sales (11) and SG&A (14) fromRevenues (4). Taxes onProfits Before Tax; computed by multiplying the tax rate contained in Major Assumptions by ProfitBefore Tax (15). Profits after taxes; computed by subtracting Taxes (16) from Profit before Tax (15). 

### Overall assessment including net income, other cash related items and adjustments and investments. Determination of cash flow generated from operations. Net income; identical to Net Income (17). Depreciation is a non

-cash cost and is added back into Net Income (20) as part of the cash flow calculation; identical to Depreciation (10). (22) Chan

ge 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). (23) Cash Flow from O perations: The cash flow from operating activities; computed

by adding Net Income (20), Depreciation (21) and subtracting Change in Working Capital (22).

3 

### includes costs incurred for new product literature and catalogs, product obsolescence, and various related marketing expenses. GRIM computation based on regulatory level selected by user (ONE, 

### TWO, THREE, 

### etc.) and allocated out for the appropriate number ofyears. (14) 

### SG&A: 

### Selling, general and administrative costs, including all non-factory costs; computed by adding R&D. (12), Product Conversion 

### (13) and standard SG&A costs, which are computed as a percentage ofbase yearRevenues (4). (15) 

### ProjitBefore Tax: 

### Profit before taxes and any financing costs; computed by subtracting the Costof Sales 

### (11) and SG&A 

### (14) fromRevenues 

### (4). (16) 

### Taxes: 

### Taxes onProjits Before Tax; 

### computed by multiplying the tax rate contained in Major Assumptions by ProfitBefore Tax (15). (17) 

### NetIncome: 

### Profits after taxes; computed by subtracting Taxes 

### (16) from Profitbefore Tax (15). (18) 

### Cash FlowStatement: 

### Overall assessment including net income, other cash related items and adjustments and investments. (19) 

### Cash Flow: 

### Determination ofcash flow generated from operations. (20) 

### NetIncome: 

### Net income; identical to NetIncome (17). (21) 

### Depreciation: 

### Depreciation is a non-cash cost and is added back into NetIncome 

### (20) as part ofthe cash flow calculation; identical to Depreciation 

### (10). (22) 

### Change in Working Capital: 

### Additional accounts receivable, inventory, and other cash investments necessary to support increased revenues; computed by multiplying apercentage from MajorAssumptions by the change inRevenues (4). (23) 

### Cash Flow from Operations: 

### The cash flow from operating activities; computed by addingNetIncome 

### (20), Depreciation 

### (21) and subtracting Change in Working Capital (22).

3(24) Capital Expenditures: Investment to maintain and replace existing production assets; computed as a percentage of base year Revenues (4) using a percentage contained in Major Assumptions. Post-regulation capital expenditures equal pre-regulation expenditures plus depreciation on Conversion Expenditures (25). 

### (25) Conversion Expenditures: Depreciation costs for meeting regulations, typically including plant, equipment, tooling and the like; GRIM computation based on regulatory level selected by user (ONE, TWO, THREE, etc.) and listed out for the appropriate number of years. (26) Cash Used in Investments: Cash required for assets; computed by adding Capital Expenditures (24) and Conversion Expenditures (25). (27) Net Cash Flow: Annual cash flow from operations and investments; computed by subtracting Cash Used in Investments (26) from Cash Flow fr om Operations (23). (28) 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 (27) from the base year to five years after the regulation goes into effect, 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 "INTEREST RATE" contained in Major Assumptions. Pre-regulation value is computed by taking the base year Net Cash Flow (27), excluding any regulation effects, and treating it as a perpetual annuity.

4 

### (24) CapitalExpenditures: 

### Investmentto maintain and replace existing production assets; computed as apercentage ofbase yearRevenues 

### (4) using apercentage contained in MajorAssumptions. Post-regulation capital expenditures equal pre-regulation expenditures plus depreciation on Conversion Expenditures (25). 

### (25) Conversion Expenditures: 

### Depreciation costs for meeting regulations, typically including plant, equipment, tooling and the like; GRIM computation based on regulatory level selected by user (ONE, TWO, THREE, 

### etc.) and listed out for the appropriate number ofyears. (26) Cash Usedin Investments: 

### Cash required for assets; computed by adding CapitalExpenditures 

### (24) and Conversion Expenditures (25). 

### (27) Net Cash Flow: 

### Annual cash flow from operations and investments; computed by subtracting Casll Used in Investments 

### (26) from Cash Flow from Operations (23). 

### (28) Post-Regulation Value: 

### Value ofthe relevant industry following adoption and implementation ofthe regulatory scenario; the present value ofthe annual Net Cash Flow (27) 

### from the base year to five years afterthe regulation goes into effect, plus atenninal 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 "INTEREST RATE" contained in MajorAssumptions. Pre-regulation value is computed by taking the base yearNet Cash Flow 

### (27), excluding any regulation effects, and treating it as aperpetual annuity.

43.0 Income statement (1)

Base Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 Price/Unit (2) 400 400 400 440 440 440 440 440 440 Unit Sales (3) 2 2 2 2 2 2 2 2 2 Revenues (4) 800 800 800 880 (6) New (5)

Base (11) Cost of Sales 336.05 316.00 640 640 640 680 680 680 680 680 680 (7 )labor 32.30 32.00 64 64 64 65 65 65 65 65 65 (8) Material 228.58 220.00 440 440 440 457 457 457 457 457 457 (9) Overhead 52.58 51.00 110 110 110 113 113 113 113 113 113 (10) Dereciation 22.59 13.00 26 26 26 45 45 45 45 45 45 14 SG&A 112 157 149 115 114 114 114 114 114 (12) R&D 16 16 16 18 18 18 18 18 18 (13) Product Conversion 45 37 2 15 Profit Before Tax 48 3 11 85 86 86 86 86 86 (16) Taxes (Rate) 19 1 4 34 35 35 35 35 35 17 Net income 29 2 7 51 52 52 52 52 52 (18) (19) Cash Flow (20) Net Income 29 2 7 51 52 52 52 52 52 21 Depreciation 26 26 26 45 45 45 45 45 45 (22) Change in Work Capital 0 0 0 14 0 0 0 0 0 (23) Cash Flow from Operations 55 28 33 82 97 97 97 97 97 (24) Capital Expenditures 32 32 32 51 51 51 51 51 51 (25) Conversion Expenditure (158) (129) (26) Cash Used in Investments 32 190 161 51 51 51 51 51 51 (27) Net Cash Flow 23 (162) (129) 30 46 46 46 46 46 (28) Others 46

0 3.0 income statement (1)

Base Year 1989 1990 1991 1992 1993 1994 1995 19% 1997 PricelUnit (2) 400 400 400 440 440 440 440 440 440 Unit Sales (3) 2 2 2 2 2 2 2 2 2 Revenues (4) 800 800 800 880 (6) (5) New Base (11) CostofSales 336.05 316.00 640 640 640 680 680 680 680 680 680 (7) labor 32.30 32.00 64 64 64 65 65 65 65 65 65 (8)Material 228.58 220.00 440 440 440 457 457 457 457 457 457 (9) Overhead 52.58 51.00 110 110 110 113 113 113 113 113 113 (10) Depreciation 22.59 13.00 26 26 26 45 45 45 45 45 45 (14)SG&A 112 157 149 115 114 114 114 114 114 (12) R&D 16 16 16 18 18 18 18 18 18 (13)ProductConversion 45 37 2 (15) ProfitBefore Tax 48 3 11 85 86 86 86 86 86 (16) Taxes (Rate) 19 1 4 34 35 35 35 35 35 (17) NetIncome 29 2 7 51 52 52 52 52 52 (18) (19) Cash Flow (20) Net Income 29 2 7 51 52 52 52 52 52 (21)Depreciation 26 26 26 45 45 45 45 45 45 (22) Change in Work 0 0 0 14 0 0 0 0 0 Capital (23) CashFlow from 55 28 33 82 97 97 97 97 97 Operations (24) Capital Expenditures (32) (32) (32) (51) (51) (51) (51) (51) (51) (25) Conversion (158) (129) Expenditure (26) CashUsed inInvestments (32) (190) (161) (51) (51) (51) (51) (51) (51) (27) NetCash Flow 23 (162) (129) 30 46 46 46 46 46 (28) Others 46

5

### 4.0 Major assumptions

In making the cash flow calculations, the model uses several major assumptions, each of which can be modified. The major assumptions are outlined below. Assumptions Tax rate ® Interest rate 

### ® Working capital as a percent of sales ® Selling general and administrative costs (in $ for base year) ® Depreciation of existing assets (as a percentage of base year revenues) ® Capital expenditures to maintain existing assets (as a percentage of base year revenues) ® Variable portion of overhead • Useful life of capital expenditures (years) • R&D, unrelated to regulation (as a percentage of revenues) 4.0 Majorassumptions In 

### making the cash flow calculations, the model uses several major assumptions, each of which can be modified. The major assumptions are outlined below. Assumptions
G 

### Tax rate
l1li 

### Interest rate
l1li 

### Working capital as a percent ofsales
G 

### Selling general and administrative costs (in $ 

### for base year)
ell 

### Depreciation ofexisting assets (as a percentage ofbase year revenues)
l1li 

### Capital expenditures to maintain existing assets (as a percentage ofbaseyear revenues) • Variable portion ofoverhead
III 

### Useful life ofcapital expenditures (years)
III 

### R&D, unrelated to regulation (as apercentage ofrevenues)

6