# 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

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# 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 m odel 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;

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# (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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# (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-3121.1303% 121.1386% 121.0873% 121.0601% 121.0458% 121.0528%Stand Case - GM24$24$25$27$28$29$121% 121% 121% 121% 121% 121%Base Case - GM20$20$21$22$23$24$013B.3 DETAILED CASH FLOW EXAMPLEStandard Case Income and Cash Flow StatementsThis 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 based on a discounted cash flow model.StandardSTANDARD CASE SCENARIOBase Year Ann. YearYear2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Industry Income StatementUnit SalesRevenuesCost of SalesLaborMaterialOverheadDepreciationStranded AssetsGross MarginGross Margin/UnitSelling, General and AdministrativeStandard SG&AR&DProduct Conversion ExpenseEarnings Before Interest and Taxes (EBIT)EBIT/RevenuesTaxes9.0%61.2%5.7%3.4%2.2%5.08%0.2350.2240.2330.2190.2000.1900.1830.1810.1830.1900.2020.2130.217126$118 $123 $116 $106 $101$97$116$117$122$129$136$139$11$11 $11 $10 $10 $9$9$10$11$11$12$12$13$77$72 $75 $71 $65 $62$59$71$71$74$79$83$85$7$7$7$7$6$6$6$7$7$7$7$8$8$4$4$4$4$4$3$3$4$4$4$4$5$5$$ ­$26$110$16$ 3$ ­$ 75.9%$ 3$ ­$ 24$ 109$ 15$ 3$ ­$ 75.9%$ 2$ ­$ 25$ 108$ 15$ 3$ ­$75.9%$ 2$ ­$ 24$ 109$ 14$ 3$ ­$ 75.9%$ 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$ 65.3%$ 2$ ­$ 24$ 132$ 15$ 3$ ­$ 75.9%$ 2$ ­$ 25$132$ 15$ 3$ ­$ 75.9%$ 2$­$ 27$ 132$ 16$ 3$­$ 85.9%$ 3$ ­$ 28$ 132$ 17$ 3$ ­$ 85.9%$ 3$ ­$ 29$ 132$ 17$ 3$ ­$ 85.9%$ 3Net Operating Profit after Taxes (NOPAT)$ 5$ 5 $ 5 $ 5 $ (2) $ (6) $ (8) $ 4 $ 5 $ 5 $ 5 $ 5 $ 5NOPATCash Flow Statement$ 5$ 5 $ 5 $ 5 $ (2) $ (6) $ (8) $ 4 $ 5 $ 5 $ 5 $ 5 $ 5Depreciation$ 4 $ 4 $ 4 $ 4 $ 4 $ 3 $ 3 $ 4 $ 4 $ 4 $ 4 $ 5 $ 5Change in Working Capital$ -$ 0 $ (0) $ 0 $ 0$0$0$(1) $(0)$(0)$(0)$ (0) $ (0)Cash Flows from Operations$ 9$ 9 $ 9 $ 9 $ 1 $ (3) $ (5) $ 7 $ 9 $ 9 $ 9 $ 10 $ 10Ordinary Capital Expenditure3.5%$(4)$(4)$(4)$ (4) $ (4) $ (4) $ (3) $ (4) $ (4) $ (4) $ (5) $ (5) $ (5)Conversion Capital Expenditures$ -$ - $ - $ - $ (1)$(2)$(2)$ - $ -$ -$-$ - $ ­Capital Investments$(4)$(4)$(4)$ (4) $ (5) $ (5) $ (5) $ (4) $ (4) $ (4) $ (5) $ (5) $ (5)Federal Production Tax Benefit$1.3$ 2.4 $ 0.4 $ ­Free Cash Flow$ 5$ 6 $ 7 $ 5 $ (4)$(8) $(10)$ 3 $ 4 $ 5 $ 5 $ 5 $ 5Terminal Value$ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ ­Present Value Factor0.000 0.000 0.000 1.000 0.933 0.870 0.812 0.757 0.706 0.659 0.615 0.573 0.535Discounted Cash Flow$ -$ -$-$ 5.02 $ (3.34) $ (7.00) $ (8.39) $ 2.58 $ 3.14 $ 2.98 $ 2.91 $ 2.88$ 2.80Industry Value thru 2043$41.6313B-4