APPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 


TABLE OF CONTENTS 


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

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

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

13B-i 

EERE-2006-STD-0127 COMMENT 66.2
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 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 amended 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 equipment 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; 

13B-1 


EERE-2006-STD-0127 COMMENT 66.2
(6)	 Depreciation: Annual depreciation computed as a percentage of Revenues (2). 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) Equipment Conversion Costs:	 Equipment conversion costs are one-time investments in 

research, development, testing, and marketing focused on making equipment designs 

comply with the new energy conservation standard. GRIM allocates these costs over the 

period between the standard’s announcement and the effective date; 

(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), Equipment 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); 

(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; 

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EERE-2006-STD-0127 COMMENT 66.2
(21) Capital Investment:	 Total investments in property, plant, and equipment are computed by 

adding Ordinary Capital Expenditures (19) and Capital Conversion Costs(20); 

(22) Federal Production Tax Credit: DOE’s estimate of the benefit of the Federal production 

tax credits found in title I section 1334 (c)(1)(B) of the Energy Policy Act of 2005 and 

updated by the Troubled Asset Relief Program (Public Law 110-343). DOE discusses how 

it calculates these estimates in appendix 13C. These are selected or unselected by the 

“Include Federal Production Tax Benefit?” cell in the Assumptions tab; 

(23) Free Cash Flow:	 Annual cash flow from operations and investments; computed by 

subtracting Capital Investment (21) from Cash Flow from Operations (18) and adding 

Federal Production Tax Credit (22); 

(24) Terminal Value:	 Estimate of the continuing value of the industry after 2043. Computed 

by growing the Free Cash Flow in year 2043 at a constant rate in perpetuity; 

(25) Present Value Factor:	 Factor used to calculate an estimate of the present value of an 

amount to be received in the future; 

(26) Discounted Cash Flow: Free Cash Flows (23) multiplied by the Present Value Factor 

(25). For 2043 the discounted cash flow includes the discounted Terminal Value (24); and 

(27) Industry Value thru 2043: The sum of Discounted Cash Flows (26). 

13B-3 


EERE-2006-STD-0127 COMMENT 66.2
121.1303% 121.

Stand Case - GM $ 24 

$ 

121% 

Base Case - GM $ 20 

$ 

0

13B.3 DETAILED CASH FLOW EXAMPLE 


Standard Case Income and Cash Flow Statements 

This tab computes key parameters from an income statement based on unit sales, revenues and COGS, and initial financial inputs (parameters as a % of revenue). It also computes an INPV base

Standard 

STANDARD CASE SCENARIO Base Year Ann. Year Year 

2006 2007 2008 2009 2010 2011 2012 2013 20

Industry Income Statement 

Unit Sales 

Revenues 

Cost of Sales 

Labor 

Material 

Overhead 

Depreciation 

Stranded Assets 

Gross Margin 

Gross Margin/Unit 

Selling, General and Administrative 

Standard SG&A 

R&D 

Product Conversion Expense 

Earnings Before Interest and Taxes (EBIT) 

EBIT/Revenues Taxes 

9.0% 

61.2% 

5.7% 

3.4% 

2.2% 

5.08% 

0.235 0.224 0.233 0.219 0.200 0.190 0.183 0.181 

$ 126 118 $ 123 $ 116 $ 106 $ $ 101 97$ $ 116 

$ 

$ 11 11 $ 11 $ 10 $ 10 $ $ 9 $ 9 10$ 

$ 

$ 77 72 $ 75 $ 71 $ 65 $ $ 62 59$ 71$ 

$ 

7$ 7$ 7$ 7$ 6$ $ 6 6$ 7$ $ 

4$ 4$ 4$ 4$ 4$ $ 3 3$ 4$ $ 

$ ­

$ 26 

$ 110 $ 16 $ 3 

$ ­

$ 7 

5.9% 

$ 3 

$ ­

$ 24 

$ 109 

$ 15 

$ 3 

$ ­

$ 7 

5.9% 

$ 2 

$ ­

$ 25 

$ 108 

$ 15 

$ 3 

$ ­

$ 7 

5.9% 

$ 2 

$ ­

$ 24 

$ 109 

$ 14 

$ 3 

$ ­

$ 7 

5.9% 

$ 2 

$ ­

$ 22 

$ 110 

$ 13 

$ 2 

$ 9 

$ (2) 

-2.3% 

$ ­

$ ­

$ 21 

$ 109 

$ 13 

$ 2 

$ 12 

$ (6) 

-6.3% 

$ ­

$ ­

$ 20 $ 109 

$ 12 

$ 2 

$ 14 

$ (8) 

-8.6% 

$ ­

$ ­

$ 24 $ 132 

$ 14 

$ 3 

$ 1 

$ 6 

5.3% 

$ 2 

$ 

$ $ 

$ 

$ 

$ 

$ 

$ 

Net Operating Profit after Taxes (NOPAT) $ 5 $ 5 $ 5 $ 5 $ (2) $ (6) $ (8) $ 4 $ 

NOPAT 

Cash Flow Statement 

$ 5 $ 5 $ 5 $ 5 $ (2) $ (6) $ (8) $ 4 $ 

Depreciation $ 4 $ 4 $ 4 $ 4 $ 4 $ 3 $ 3 $ 4 $ Change in Working Capital $ - $ 0 $ (0) $ 0 $ 0 $ 0 $ 0 $ (1) $ 

Cash Flows from Operations $ 9 $ 9 $ 9 $ 9 $ 1 $ (3) $ (5) $ 7 $ 

Ordinary Capital Expenditure 3.5% $ (4) $ (4) $ (4) $ (4) $ (4) $ (4) $ (3) $ (4) $ 

Conversion Capital Expenditures $ - $ - $ - $ - $ (1) $ (2) $ (2) $ - $ 

Capital Investments $ (4) $ (4) $ (4) $ (4) $ (5) $ (5) $ (5) $ (4) $ 

Federal Production Tax Benefit $ 1.3 $ 2.4 $ 0.4 $ ­Free Cash Flow $ 5 $ 6 $ 7 $ 5 $ (4) $ (8) $ (10) $ 3 $ 

Terminal Value $ - $ - $ - $ - $ - $ - $ - $ - $ Present Value Factor 0.000 0.000 0.000 1.000 0.933 0.870 0.812 0.757 Discounted Cash Flow $ - $ - $ - $ 5.02 $ (3.34) $ (7.00) $ (8.39) $ 2.58 $ Industry Value thru 2043 $ 41.63 

13B-4 


EERE-2006-STD-0127 COMMENT 66.2