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1.0 Overview of GRIM spreadsheet 

### The Government Regulatory Impact Model (GRIM) was used to evaluate the cash flow impacts ofregulations onthe clothes washer industry. The basic structure ofthe GRIM, illustrated in Figure 1, is a standard annual cash flow analysis that uses manufacturer price, manufacturing costs, shipments and industry financial information as an input, and accepts a set ofregulatory conditions as changes in costs, investments and associated margms.

Price

Quantity

Cash Flow
Figure 1. Using GRIM to conductthe cash flow analysis ... Manufacturing Costs

Financial Information



# ....

The GRIM spreadsheet uses a number offactors-annual expected revenues, cost of sales, selling and administration costs, taxes, changes inworking capital, and capital expenditures related to new standards--to arrive at a series ofannual cash flows, beginning from the base year ofthe analysis and continuing explicitly for several years afterthe implementation ofthe standard. The measure ofindustry netpresentvalue (NPV) is calculatedby discounting the stream ofannual cash flows. The GRIM calculates cash flows by year andthen determines the present value ofthese cash flows, both without regulations (Base Case) and with regulations (Standard Case), using the appropriate discountrate. Forthe purpose ofthis analysis, theBase Case scenario represents the business scenario inthe absence ofa standard. Incase a new clothes washer standard comes into effect, it will change the productmix ofclothes washers being sold inthe market and their associated prices, costs and shipments. Such a scenario is called the Standard Case scenario. Hence, Base Case NPV implies the present value ofcash flows inthe absence ofa standard. Similarly, Standard Case NPV implies the present value ofcashflows inthe scenario where a standard comes into effect. To project future cash flows, the clothes washer GRIM analysis assumes 2000 as the announcementyear ofthe standard, and 2003 as the year when the new standard will come into effect.

12.0 Preliminary cash flow analysis presented atthe December 1998 workshop 

### A preliminary version ofthe GRIM (GRIM_lph.xls) accompaniedthe Preliminary TSD. The preliminary GRIM was used to develop a preliminaryBase Case industry NPV. For the preliminaryBase Case analysis, presented atthe December 1998 workshop, information was obtained from the following sources: • Manufacturer's prices were obtained from the AHAM Fact Book and Current Industrial Reports. • Manufacturing costs were estimated using an industry cost structure developed from manufacturers' 10-K statements and the 1992 Census ofManufacturers. • Financial information was obtained from manufacturers' 10-K statements and other publicly available industry statistics such as Standards and Poor's Reports and Moody's Company Reports. • Preliminary future shipments were obtained using current industry shipment statistics and projecting a historical annual growthrate of2.3%.
3.0 GRIM spreadsheet for the NOPR Manufacturer Impact Analysis 

### The version ofthe GRIM distributed withthe Preliminary TSD assumedthat clothes washer shipments remained the same underboththe Base Case andStandard Case scenarios. Furthermore, theBase Case shipments were assumedto be entirely baseline V

- axis models. It

### was stated atthe December 1998 clothes washerrulemaking workshop that shipment scenarios wouldbe modified once the clothes washer shipment information was updated for the National Energy Savings Spreadsheet (NES). ADL received the shipment forecasts for the NOPRanalysis inApril 1999, and made modifications to the GRIM inorderto accommodate the new shipmentforecasts. The modified GRIM spreadsheet models the market segments representing V-axis and H-axis washers in separate worksheets inboth theBase Case andtheStandard Case. Furthermore, additional informationprovidedby AHAM enabled ADL to separate total incremental fixed costs into the two categories used inGRIM: capitalconversion costs consisting ofequipment and tooling costs; and design. conversion costs consisting of R&D and marketing costs. The modified GRIM spreadsheet along withthe preliminaryBase Case information was then sentto all the manufacturers inadvance ofthe scheduled interviewdates. The following subsections presentthe shipmentforecasts and describe the modifications made to the GRIM.

23.1 Shipments Forecasts 

### Priorto beginning the manufacturer visits, ADL updated the GRIM with shipment forecasts developed for the NES. These forecasts included shipments for both V-axis and H-axis clothes washers. Tables 1and2presentthe 

### Base Case and 

### Standard Case shipmentforecasts, for the years 1996 through 2012. The methodology used to derive these forecasts is described in the DOE document entitled "Shipments Write-up."
Table 1. Clothes washer shipment forecasts for the Base Case and the V-axis standard levels (i.e., 0 to 25% efficiency improvement levels)

Baseline EfficiencvLevel1 EfficknrvLevel2 EffickncvLevel3 EfficiencvLevel4 EffickncvLevel 5**~ff.** bnnrovement

### =**5~**tn; J,.,,,rovement =JO 

### :n: J,.,,,rovement= 15 lff. J,.,,,rovement

### =20' 'ff. Jmnrovement = 25 Base Case Standard Case Standard Case Standard Case Standard Case Standard Case Year V-Axis H-Axis V-Axis H-Axis V-Axis H-Axis V-Axis H-Axis V-Axis H-Axis V-Axis H-Axis Shipment Shipment Shipment Shipment Shipment Shipment Shipment Shipment Shipment Shipment Shipment Shipment

million million million million million million million million million million million million 1996 6.00 0.12 6.00 0.12 6.00 0.12 6.00 0.12 6.00 0.12 

# - 6.00 0.12 1997 6.05 0.25 6.05 0.25 6.05 0.25 6.05 0.25 6.05 0.25 6.05 0.25 1998 6.02 0.40 6.02 0.40 6.02 0.40 6.02 0.40 6.02 0.40 6.02 0.40 1999 6.08 0.44 6.08 0.44 6.08 0.44 6.08 0.44 6.08 0.44 6.08 0.44 2000 6.18 0.48 6.18 0.48 6.18 0.48 6.18 0.48 6.18 0.48 6.18 0.48 2001 6.24 0.52 6.24 0.52 6.24 0.52 6.24 0.52 6.24 0.52 6.24 0.52 2002 6.28 0.56 6.28 0.56 6.28 0.56 6.28 0.56 6.28 0.56 6.28 0.56 2003 6.28 0.60 6.27 0.60 6.27 0.60 6.27 0.60 6.14 0.59 5.81 0.56 2004 6.27 0.64 6.26 0.64 6.26 0.64 6.25 0.64 6.14 0.63 5.83 0.59 2005 6.27 0.68 6.27 0.68 6.26 0.68 6.26 0.68 6.16 0.66 5.87 0.63 2006 6.32 0.72 6.31 0.72 6.31 0.72 6.30 0.72 6.20 0.71 5.93 0.68 2007 6.39 0.77 6.38 0.77 6.38 0.77 6.37 0.77 6.28 0.76 6.02 0.73 2008 6.43 0.82 6.43 0.81 6.42 0.81 6.41 0.81 6.33 0.80 6.10 0.77 2009 6.46 0.86 6.45 0.86 6.45 0.86 6.44 0.86 6.36 0.85 6.16 0.82 2010 6.50 0.91 6.49 0.91 6.49 0.91 6.48 0.90 6.41 0.90 6.24 0.87 2011 6.53 0.95 6.53 0.95 6.52 0.95 6.51 0.95 6.46 0.94 6.30 0.92 2012 6.57 1.00 6.57 1.00 6.56 1.00 6.55 1.00 6.50 0.99 6.36 0.97


### AtV-axis standard levels, the post-standard product 

### mix includes boththe V-axis and Haxis machines, whereas at the H-axis levels (35% orabove) 

### Standard Case shipments include H-axis washers only.

3Table 2. Clothes washer shipment forecasts for the Base Case and the H-axis standard levels (i.e., 35% to 50% efficiency improvement levels) Baseline 35 %Elf. 40 %Elf. 45 %Elf. 50 %Eff. Improvement Improvement Improvement Improvement Base Case Standard Standard Standard Standard Year V-Axis H-Axis Case Case Case Case Shipment Shipment Shipment Shipment Shipment Shipment

million million million million million million 1996 6.00 0.12 6.12 6.12 6.12 6.12 1997 6.05 0.25 6.30 6.30 6.30 6.30 1998 6.02 0.40 6.42 6.42 6.42 6.42 1999 6.08 0.44 6.52 6.52 6.52 6.52 2000 6.18 0.48 6.66 6.66 6.66 6.66 2001 6.24 0.52 6.76 6.76 6.76 6.76 2002 6.28 0.56 6.84 6.84 6.84 6.84 2003 6.28 0.60 5.41 5.41 4.81 4.75 2004 6.27 0.64 5.52 5.52 4.92 4.86 2005 6.27 0.68 5.63 5.63 5.04 4.98 2006 6.32 0.72 5.76 5.76 5.19 5.13 2007 6.39 0.77 5.94 5.94 5.38 

# - 5.32 2008 6.43 0.82 6.12 6.12 5.59 5.53 2009 6.46 0.86 6.31 6.31 5.81 5.76 2010 6.50 0.91 6.51 6.51 6.06 6.01 2011 6.53 0.95 6.69 6.69 6.27 6.23 2012 6.57 1.00 6.85 6.85 6.46 6.42 

### Figure 2 illustrates the shipment forecasts graphically. It shows a drop in shipments beginning atthe standardyear (2003) for most efficiency levels, withthe negative impact on sales highest atmore stringent standard levels. The percentage drop in shipments in the years 2003 and five years thereafter (2008) are outlined in Table 3.

4Shipments by Standard Level

... 7.00**+..:.:+c'-f--+--+--+--+-h,,,,..1'7""'1"--1-..:...,iO"'-+-+-"+'--ilt"-+--+--1'~-** c:**~** .E ; 6.50 +::r'.,..._-t-- c: Q) E a.**~** 6.00**+..:.:+--+--+--+-1t+-+-t--t--'..1!7"-'.:b'-r:.~+c+--+--+--+--+,.:....**

5.50

4.50 co IJ) 0 ;; N ..., ..,. "' <D ,._ co IJ) 0 

### "' ..., ..,. 

### "' <D**~** IJ) IJ) 0 0 0 0 0 0 0 0 0 ;; ;; ;; ;; c;**~ ~**  0 0 0 0 0 0 0 0 0 0 C> 0 0 N N N N N N N N N N N N 

### "' N N N N N Year co 0 N IJ) 0 ;; N 0 N N ;::; N ..., 

### ..,. 

### "' <D ,._ co 

### "' N N N N N N N N 0 0 0 0 0 0 0 0 0 N N N N N N N N 

### "'
Figure 2. Clothes washer shipment forecasts for Base Case and the nine potential standard levels.

Table 3. Percentage decrease in shipments in 2003 and 2008 .·.Year2008.

## '.[~J~;·~~jl
.. 1pmen ·**~? ~~** **:·~:~/'F§';'nlil''<<'.-:J:<;'<~~** 5% 6.88 6.87 0.06% 7.25 7.24 10% 6.88 6.87 0.09% 7.25 7.24 15% 6.88 6.87 0.15% 7.25 7.23 20% 6.88 6.73 2.09% 7.25 7.13 25% 6.88 6.37 7.40% 7.25 6.87 35% 6.88 5.41 21.26% 7.25 6.12 40% 6.88 5.41 21.26% 7.25 6.12 45% 6.88 4.81 30.07% 7.25 5.59 50% 6.88 4.75 30.96% 7.25 5.53 0 ..., 0 N --base -It- eff level 1 eff level 2 eff level 3

---- eff level 4

---- eff !eve! 5 -+-eff !ever 6 -effleve!7**~-effleve!8** -4-effleve!9

0.06% 0.15% 0.29% 1.58% 5.19% 15.54% 15.54% 22.90% 23.67%

53.1.1 Impact of new energy efficiency standards for clothes washers on export sales 

### Export sales are not included in the shipment forecasts shown in Tables 1 and 2. The shipment forecasts developed for the NES include only clothes washers that are being used domestically. The NES spreadsheet calculates the national energy savings and hence the shipments used inthis spreadsheet include: • clothes washers that are manufactured in the U.S. for the domestic market, and • clothes washers that are imported for use in the domestic market. Export and import statistics for the U.S. clothes washer industry, obtained from the Association ofHome Appliance Manufacturers' (AHAM) Fact Book, are presented in Table 4. The AHAM Fact Bookreports shipments underthree categories: (1) Industry unit shipments (including shipments for the U.S. market whether imported or domestically produced, and export shipments); (2) Exports, and (3) Imports. (Export and import data in the AHAM Fact Book is obtained from the Department ofCommerce's EM545 and IM145 reports, respectively.) Table 4. Annual shipments ofclothes washers from 1990 through 1996 obtained from the AHAM Fact Book
Industry unit shi ments 6.192 6.197 6.515 0.601 0.690 0.756 0.044 0.035 0.077 6.793 0.764 0.132 7.035 6.901 7.129 0.868 0.801 0.884 0.100 0.105 0.145 

### As canbe observed inTable 4, export sales accounted for approximately 12.5% of industry unit shipments in the year 1996. In orderto account for the impact onboth domestic and export sales, ADL adjusted the shipment forecasts from the NES spreadsheet for the MIA. The shipment information for the year 1996 was used for calibration. The calibrationprocess is summarized inTable 5.

6Table 5. Annual shipments ofclothes washers from 1990 through 1996 obtained from the AHAM Fact Book



### Industry unit shi ments* Export Import Clothes washers used domesticall Clothes washers produced by

### U.S. manufacturers domestic

### +ex ort 7.129 0.884 0.145 6.245 6.984 6.120 1.141 (=6.984/6.120) 

### * Includes shipments for the U.S. market whether imported or domestically produced, and export shipments.
3.2 Manufacturing Costs and Manufacturer Price 3.2.1 Baseline V-axis and H-axis costs and prices 

### The GRIM developed for theNotice ofProposed Rulemaking (NOPR) MIA analysis considers V-axis and H-axis clothes washer segments separately. The baseline cost ofan H-axis washer was characterizedusing the incremental cost data atthe 35%efficiency improvement level as submittedby AHAM, i.e., the

### Base Case H-Axis washer is assumedto be anH-Axis machine representing a 35% efficiency improvementoverthe baseline V-Axis machine (EF=0.817). H-axis costs are equal to the

### Base Case V-axis costs plus incremental costs for a 35%efficiency improvement level. Baseline H-Axis cost assumptions used in the GRIM analysis Baseline V-Axis material cost+Incremental material cost for the 35% efficienc level Baseline V-Axis labor cost + Incremental labor cost for the 35% efficienc level Baseline V-Axis overhead cost + Incremental overhead cost for the 35% efficienc level Baseline V-Axis depreciation cost+ (Incremental capital conversion costperunit for the 35% efficiency level I useful life ofthe fixed investment Publicly available information suggests that currently sold H-axis washers are, on average, more profitable than the baseline V-axis washers characterized in GRIM. To

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### reflectthis the GRIM assumes a profit of 10%before tax for the H-axis segment compared to 6.2% for the Y-axis market. This profit level likely understates the current profitability ofH-axis models butaccounts for the expected increased competition inthis segmentin future years. Thebaseline H-axis washer price was estimatedusing the baseline H-axis washer costs and applying the markup neededto arrive at a 10% profitbefore taxvalue. This corresponds to a markup of1.5 overthe incremental full production cost at the 35% efficiency level. Adding this amount to the baseline Y-axis price of$285.90 results in a 

### Base Case H-axis washerprice of$478.20. 

### Baseline H-Axis price assumption used in GRIM analysis Baseline Y-Axis manufacturerprice 

### + Mark-up x Incremental full roduction cost perunit)* Incremental material 

### + incremental labor 

### + incremental overhead

### + ca ital conversion

### + desi convers19n

Table 6 summarizesthe revised cost structures for baseline Y-axis and H-axis washers. Table 6. Industry average baseline cost structure

Asa%of $perunit Iner. Cost over $perunit V-axis baseline V-axis ManufacturerPrice 100% $285.90 $478.20 Markup 1.35 1.50 Manufacturing Costs Material 52.0% $148.67 $86.73 $235.43 Labor 10.2% $29.16 $10.94 $40.24 Overhead 8.3% $23.73 $7.78 $31.23 Depreciation 3.5% $10.01 $22.72 $27.70 SG&A 18.0% $51.46 $86.07 R&D 1.8% $5.15 $8.61
Profitbefore Tax 6.2% $17.73 $48.88 TaxRate 42.8% Profit after Tax 3.6% $10.14 $27.96


### 3.2.2 Standards Case Costs and Prices

8Once a standard level is selected, GRIM obtains the incremental costs ofmeetingthe standards level from the AHAMcost submittal inthe "AHAM_DATA"worksheet The costs 

### to upgrade the Y-axis baseline for the standard level selected are shown on the major assumptions page under the column entitledV/H-axis. Thetitle reflects the fact thatthe Y-axis baseline may beconverted to Y orH axis depending on the level selected. The base-case H-axis clothes washers (35% efficiency level) will need to be upgraded as well ifthe standards level selected is above 35%. Forexample, the cost ofupgrading an H-axis clothes washerfrom 35%to 50% is calculated as the costof upgrading from a baselineV-axis to 50% less the costofupgrading from a baseline V-axis to 35%. Table 7. Standards Case Costs for the 50% standard level Standard Case Incremental Costs

Materials I Unit Labor/Unit Overhead I Unit (excl. Depreciation) Industry Mark-up (over full production costs) Standard Year Unit Price
The standards case prices are obtained as: Standards Case manufacturerprice

### = V/H-Axis (over Base Case V-Axis) H-Axis (over Base Case H-Axis) ($)per unit ($)per unit ($)per unit

Baseline manufacturerprice

### +Mark-up x (incremental full production cost perunit)
3.2.3 Standards Case Conversion Costs AHAM providedthe lump sum capitalconversion costs necessary

### to upgrade tooling and production facilities based on an annual production rate of7.068 million clothes washers. AHAM also provided separate one timeproductconversion costs associated with standards related R&D and marketing. These lump sums are converted inperunit costs on theworksheettitled AHAM_DATA. Total Conversion costs

### to upgrade the baseline Y-axis equal perunit conversion coststimesBase Case shipments in standards year(2003). Total conversion costs to upgrade the base case H-axis are based onthe H-axisBase Case shipments in the standard year (2003) multiplied bythe difference in conversion costs atthe standard level and 35% level.

9Table 8. Conversion Costs atthe 50% standard level Conversion Costs Base Case Shipments in Standard Year (2003) Capital Expenditures Useful Life Per unit capital conversion cost Design & Marketing Expenses (Product Conversion) Per unit product conversion costs VIII-Axis H-Axis



### ASSUMPTION: DOE's shipment forecasts suggest significant drops in clothes washer sales after a standard due to price elasticity effects. It is impossibletopredict exactly the new shipment numbers after a standard, yet it will be necessary to make an investment decision as to the capacity ofthe plant far in advance ofthe standard. The current assumption in GRIM is that manufacturers will build capacity based on their

### Base Case shipment forecast for the standard year. A drop in shipments will result in overcapacity and will be captured in GRIM as an increase in unit conversion costs.



### Conversion ExpenditureFactors Theconversion expenditure factors in the 'Conversion Factors' worksheethave been modified based on comments received. These factors determine the timing ofcapitalconversion investments.

3.2.4 Assumptions used for calculating Variable and Fixed Overhead Costs One ofthe challenges posed by a sudden drop in shipments in the standards case consists of reducing overhead in proportion to lost revenue. The new GRIM allows the userto specify what proportion ofoverhead is variable intheperiodthat shipments adjust from their pre-standard to post standard levels. (this assumption is applicable to oneyearbefore andthree years afterthe Standardyear, inthe V-Axis-Standard Case). Short-term Variable Overhead as% ofTotal 60% (this assumption is applicable to oneyearbefore and**~-----~** Threeyears after the Standard, in the V-Axis-Standard Case)

3.2.5 Ordinary Capital Expenditures TheBase Case ordinary capital expenditures as a percentage ofrevenue has been changed in order to reflectthe lower shipmentgrowth forecast compared to the earlier GRIM. (Capital expenditures of-3.90% instead of-4.43%.) jordinary Capital Expenditures -3.90%jo/ Revenue

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3.2.6 Discount Rate Based on comments received atthe December 1998 clothes washer workshop, the real cost ofdebt calculation was revised by taking the nominal costofdebt, adjusting for taxes, and then correcting for inflation. As a result ofthis revision, the discountrate forNPV changed from 7.25% to 6.65%.
3.3 Cash Flow Results 3.3.1 Base Case NPV 

### GRIM was used to develop the Base Case 

### cash flow estimates for the U.S. clothes washer industry. The baseline manufacturerprice and cost structure developed in the preliminary TSD (Chapter 6, pg. 6-10 and 6-11) and Section 3.2.1, and summarized in Table 6 was used to develop cash flow estimates and hence the value ofthe V-axis and the H-axis washer segments. The values ofthese two segments were then summed to arrive atthe overall industry value inthe Base Case. 

### The cash flow results are summarized in Table 9. Table 9. Base Case industry value (NPV)

V-Axis 1040.7 H-axis 276.3 Total 1317.0

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