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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 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, etc.), entered as an

input variable by user.

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EE-RM-97-500 COMMENT 20H

) ~H 

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 defmed, 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, 

ana, 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 defmitions of listed items on the printout of the output sheet. 

(see Section 3.0) 

(1) Income Statement: 

(2) PricelUnit: 

Overall calculation of Net Income Before 

Financing (17) using revenue and cost items subject 

to income tax effects as described in (2) through 

(17). 

Actual manufacturer unit price charged to the first 

level of distribution (distributor, etc.), entered as an 

input variable by user. 

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(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 year Revenues

(4). Annual depreciation on post-regulation assets is

computed by dividing Capital Expenditures (24) by

a 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 of Revenues

(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

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EE-RM-97-500 COMMENT 20H

(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 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). 

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 of overhead (excluding 

depreciation) that is variable set under the Major 

Assumptions. 

Annual depreciation on pre-regulation assets; 

computed as a percentage of base year Revenues 

(4). Annual depreciation on post-regulation assets is 

computed by dividing Capital Expenditures (24) by 

a useful life from Major Assumptions. For postregulation years, Depreciation is the sum of 

·depreciation on pre- and post-regulation assets. 

Total cost of sales, computed by adding Labor (7), 

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

Research and development costs unrelated to 

regulations; computed as a percentage of Revenues 

(4). From Major Assumptions. 

Expensable costs related to meeting a regulation, 

often including product redesign costs and 

expensable factory conversion expenses. Also 

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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 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

year Revenues (4).

Profit before taxes and any financing costs;

computed by subtracting the Cost ofSales (11) and

SG&A ( 14) from Revenues (4).

Taxes on Profits Before Tax; computed by

multiplying the tax rate contained in Major

Assumptions by Profit Before 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) 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).

(23) Cash Flow from Operations: The cash flow from operating activities; computed

by adding Net Income (20), Depreciation (21) and

subtracting Change in Working Capital (22).

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EE-RM-97-500 COMMENT 20H

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 of years. 

(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 of base 

year Revenues (4). 

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

computed by subtracting the Cost of Sales (11) and 

SG&A (14) from Revenues (4). 

(16) Taxes: Taxes on Projits Before Tax; computed by 

multiplying the tax rate contained in Major 

Assumptions by Profit Before Tax (15). 

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

(16) from Profit before Tax (15). 

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

related items and adjustments and investments. 

(19) Cash Flow: Determination of cash flow generated from 

operations. 

(20) Net Income: Net income; identical to Net Income (17). 

(21) Depreciation: 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) 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). 

(23) Cash Flow from Operations: The cash flow from operating activities; computed 

by adding Net Income (20), Depreciation (21) and 

subtracting Change in Working Capital (22). 

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(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 from 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.

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(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 Casll Used in Investments 

(26) from Cash Flow from 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 tenninal 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. 

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3.0 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

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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) 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) 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) 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 0 0 0 14 0 0 0 0 0 

Capital 

(23) Cash Flow 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) 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 

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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)

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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 

G Tax rate 

l1li Interest rate 

l1li Working capital as a percent of sales 

G Selling general and administrative costs (in $ for base year) 

ell Depreciation of existing assets (as a percentage of base 

year revenues) 

l1li Capital expenditures to maintain existing assets (as a 

percentage of base year revenues) 

• Variable portion of overhead 

III Useful life of capital expenditures (years) 

III R&D, unrelated to regulation (as a percentage of revenues) 

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