APPENDIX Y. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

TABLE OF CONTENTS

Y.1 INTRODUCTION AND PURPOSE ...................................... Y-1

Y.2 MODEL DESCRIPTION .............................................. Y-1

 EE-RM/STD-01-350 COMMENT 164

APPENDIX Y. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

TABLE OF CONTENTS 

Y.l INTRODUCTION AND PURPOSE .. ....... . .. .... . .. ......... . . ........ Y-l 

Y.2 MODEL DESCRIPTION .............. .. . . .......... . .. . .. .. .......... Y-l 

Y-i 
APPENDIX Y. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

Y.1 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. The model calculates the actual cash flows by year

and then determines the present value of those cash flows both without regulations, base case,

and under different trial standard levels (TSLs).

Output comes from the model in terms of summary financial metrics, graphs of major

variables, and, when appropriate, access to the complete cash flow calculation.

Y.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standard annual cash flow analysis that 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 Y.3)

(1) Unit Sales: Total annual shipments for the industry were obtained from the National

Energy Savings Spreadsheet. The distribution of shipments by efficiency level was modified

based on feedback from manufacturers regarding the ability to sell baseline and premium

products depending on the standard level proposed;

(2) Revenues: Annual revenues - computed by multiplying equipment unit price at each

efficience level by the appropriate manufacturer markup;

(3) Labor: Factory direct labor and fringe benefit costs;

(4) Material: Purchased materials and components;

(5) Overhead: Factory overhead excluding depreciation;

Y-1

 EE-RM/STD-01-350 COMMENT 164

APPENDIX Y. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) 

Y.1 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. The model calculates the actual cash flows by year 

and then determines the present value of those cash flows both without regulations, base case, 

and under different trial standard levels (TSLs). 

Output comes from the model in terms of summary financial metrics, graphs of major 

variables, and, when appropriate, access to the complete cash flow calculation. 

Y.2 MODEL DESCRIPTION 

The basic structure of the GRIM is a standard annual cash flow analysis that 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 fmancial charges. The cash flow calculation converts profit after 

taxes into an annual cash flow by including investment and non-cash items. Below are 

definitions oflisted items on the printout of the output sheet. (see Section y'3) 

(1) Unit Sales: Total annual shipments for the industry were obtained from the National 

Energy Savings Spreadsheet. The distribution of shipments by efficiency level was modified 

based on feedback from manufacturers regarding the ability to sell baseline and premium 

products depending on the standard level proposed; 

(2) Revenues: Annual revenues - computed by multiplying equipment unit price at each 

efficience level by the appropriate manufacturer markup; 

(3) Labor: Factory direct labor and fringe benefit costs; 

(4) Material: Purchased materials and components; 

(5) Overhead: Factory overhead excluding depreciation; 

Y-I 
(6) Freight: Annual shipping costs computed as a percentage ofRevenues (2);

(7) Depreciation: Annual depreciation computed as a percentage of Revenues (2);

(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 R&D of 1.3 percent ofRevenues (2);

(10) Product Conversion: Conversion expenses are one-time investments in research,

development, testing, and marketing focused on making product designs comply with the new

efficiency standard. GRIM allocates these costs over the period between the standard's

announcement and effective dates;

(11) Earnings Before Interest and Taxes (EBIT): Includes profits before deductions for interest

paid and taxes;

(12) Stranded Assets: A one time write-down on stranded assets is computed as the difference

between the GRIM two capital expenditures scenarios;

(13) EBIT as a Percentage of Sales: The GRIM calculates EBIT as a percentage of sales as a

comparison with the industry's average reported in financial statements;

(14) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major

Assumptions by EBIT (11).

(15) Net Operating Profits After Taxes (NOPAT): Profit after taxes and any financing costs;

computed by subtracting Cost of Sales ((3) to (7)), SG&A (8), R&D (9), and Product

Conversion (10) from Revenues (2);

(16) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

(17) Depreciation repeated: Depreciation is repeated in the Statement of Cash Flows;

(18) 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 (2) by the change in annual revenues.

(19) Cash Flow From Operations: Calculated by taking NOPAT (16), adding back non-cash

items such as a Depreciation (17), and subtracting out Change in Working Capital (18);

(20) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to

maintain and replace existing production assets computed as a percentage of Revenues (2);

Y-2

 EE-RM/STD-01-350 COMMENT 164

(6) Freight: Annual shipping costs computed as a percentage of Revenues (2); 

(7) Depreciation: Annual depreciation computed as a percentage of Revenues (2); 

(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 R&D of 1.3 percent of Revenues (2); 

(10) Product Conversion: Conversion expenses are one-time investments in research, 

development, testing, and marketing focused on making product designs comply with the new 

efficiency standard. GRIM allocates these costs over the period between the standard's 

announcement and effective dates; 

(11) Earnings Before Interest and Taxes (EBIT): Includes profits before deductions for interest 

paid and taxes; 

(12) Stranded Assets: A one time write-down on stranded assets is computed as the difference 

between the GRIM two capital expenditures scenarios; 

(13) EBIT as a Percentage of Sales: The GRIM calculates EBIT as a percentage of sales as a 

comparison with the industry's average reported in financial statements; 

(14) Taxes: Taxes on ERIT (11) are calculated by multiplying the tax rate contained in Major 

Assumptions by ERIT (11). 

(15) Net Operating Profits After Taxes (NOPAT): Profit after taxes and any financing costs; 

computed by subtracting Cost of Sales ((3) to (7)), SG&A (8), R&D (9), and Product 

Conversion (10) from Revenues (2); 

(16) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows; 

(17) Depreciation repeated: Depreciation is repeated in the Statement of Cash Flows; 

(18) 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 (2) by the change in annual revenues. 

(19) Cash Flow From Operations: Calculated by taking NOPAT (16), adding back non-cash 

items such as a Depreciation (17), and subtracting out Change in Working Capital (18); 

(20) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to 

maintain and replace existing production assets computed as a percentage of Revenues (2); 

Y-2 
(21) Conversion Capital Expenditures: Conversion capital-expenditures 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;

(22) Capital Investments: Total investments in property, plant, and equipment is computed by

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

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

subtracting Cash Used in Investments (21) from Cash Flow from Operations (18);

(24) Terminal Value: Estimate of the continuing value of the industry after 2035 and computed

by growing the Free Cash Flow in year 2038 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: Net Cash Flows (23) multiplied by the Present Value Factor (25).

For 2035 the discounted cash flow includes the discounted Terminal Value (24);

(27) Industry Net Present Value: The sum ofDiscounted Cash Flows (26);

 EE-RM/STD-01-350 COMMENT 164

(21) Conversion Capital Expenditures: Conversion capital-expenditures 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; 

(22) Capital Investments: Total investments in property, plant, and equipment is computed by 

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

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

subtracting Cash Used in Investments (21) from Cash Flow from Operations (18); 

(24) Terminal Value: Estimate of the continuing value of the industry after 2035 and computed 

by growing the Free Cash Flow in year 2038 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: Net Cash Flows (23) multiplied by the Present Value Factor (25). 

For 2035 the discounted cash flow includes the discounted Terminal Value (24); 

(27) Industry Net Present Value: The sum of Discounted Cash Flows (26); 

Y-3 
STANDARD CASE SCENARIO

lncnmr:^tatrmcnt (minj

(1) Unit Sales

(2) Revenues

Cost of Sales

(3) Labor

(4) Material

(5) Overhead

(6) Freight

(7) Depreciation

Selling, General and Administrative

(8) Standard SG&A

(9) R&D

(10) Product Conversion Expense

(11) EBIT

(12) One-time writeoff on stranded assets

(13) EBT as % of Revenues

(14) Taxes

(15) NOPAT

Cush Film Srtu;;uu at

(16) `OPxC $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 1 $ 0 $ (1)

(17) Depreciation $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 1

(18) Change in Working Capital $ - $ 0.83 $ 0.69 $ 0.64 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 S 0

(19) Cash Flows from Operations $ 5 $ 5.13 $ 4.76 $ 4.49 $ 4 $ 4 $ 4 $ 4 $ 4 $ 3 $ 2 $ 1

(20) Ordinary Capital Expenditures $ (1.79) $ (1.68) $ (1.59) $ (1.51) $ (1.47) $ (1.44) $ (1.42) $ (1.40) $ (1.38) $ (1.33) $ (1.29) $ (1.26)

(21) Conversion Capital Expenditures S - $ - $ - $ - $ - $ - $ - $ - $ (0.1) $ (1.2) $ (2.5) $ (3.2)

(22) Cash Used In Investment $ (2) $ (2) $ (2) $ (1.51) $ (1) $ (1) $ (1) $ (1) $ (2) $ (3) $ (4) $ (4)

(23) Net Cash Flow $ 3 $ 3 $ 3 $ 2.99 $ 3 $ 2 $ 2 $ 2 $ 2 $ 0 $ (2) $ (3)

(24) Terminal Value $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

(25) Present Value Factor 1.00 0.94 0.89 0.84 0.79 0.74 0.70 0.66 0.62 0.59 0.55 0.52

(26) Discounted Cash Flow $ 3 $ 3 $ 3 $ 2.50 $ 2 $ 2 $ 2 $ 2 $ 1 $ 0 $ (1) $ (2)

(27) Industry Value thru 2038 $ 29.28

15.9%

46.3%

5.0%

4.5%

Announcem

Base Year ent Year

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.127 0.119 0.113 0.107 0.104 0.102 0.101 0.100 0.098 0.095 0.092 0.090

$ 105 $ 99 S 94 S 89 $ 86 $ 85 $ 84 S 83 S 81 $ 78 1 76 $ 74

$ 17 $ 16 S 15 S 14 $ 14 $ 13 $ 13 $ 13 $ 13 $ 13 $ 12 $ 12

$ 49 $ 46 S 43 $ 41 S 40 $ 39 $ 39 S 38 S 38 S 36 35 $ 34

$ 5 $ 5 $ 5 $ 4 $ 4 $ 4 $ 4 $ 4 S 4 $ 4 4 $ 4

$ 5 $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 5 3 $ 3

2.00% $ 2.10 $ 1.98 $ 1.87 $ 1.77 $ 1.73 $ 1.69 $ 1.68 $ 1.65 $ 1.62 $ 1.57 $ 1.52 $ 1.48

21.0% $ 22 $ 21 $ 20 $ 19 $ 18 $ 18 $ 18 $ 17 $ 17 $ 16 $ 16 $ 16

1.2% $ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1$ 1

$ - $ - $ - $ - $ - $ - $ - $ - $ 0.2 $ 1.4 $ 3.0 $ 3.7

$ -

3.7% $ 4.29 $ 4.03 $ 3.82 $ 3.62 $ 3.52 $ 3.45 $ 3.42 $ 3.37 $ 3.14 $ 1.78 $ 0.10 $ (0.72)

$ 3

4.08% 4.08% 4.08% 4.08% 4.08% 4.08% 4.08% 4.08% 3.87% 2.27% 0.13% -0.98%

42.5% $ 2 $ 2 $ 2 $ 2 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 0 $

$ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 1 $ 0 $ (1)

2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.23% 1.31% 0.08% -0.98%

I

Y-4

 EE-RM/STD-01-350 COMMENT 164

STANDARD CASE SCENARIO 

rn~qmv SiAtemcut (mID) , 

(1) Unit Sales 

(2) Revenues 

Cost of Sales 

(3) Labor 

(4) Material 

(5) Overhead 

(6) Freight 

(7) Depreciation 

(8) 

(9) 

(10) 

(11) 

(12) 

(13) 

Selling, General and Administrative 

Standard SG&A 

R&D 

Product Conversion Expense 

EBIT 

One-time writeoff on stranded assets 

EBT as % of Revenues 

(14) Taxes 

(15) NOPAT 

(16) 

(17) 

(18) 

(19) 

(20) Ordinary Capital Expenditures 

(21) Conversion Capital Expenditures 

(22) Cash Used In Investment 

(23) Net Cash Flow 

(24) Terminal Value 

(25) Present Value Factor 

(26) Discounted Cash Flow 

(27) Industry Value thru 2038 

15.9% 

46.3% 

5.0% 

4.5% 

$ 

$ 

$ 

$ 

$ 

Base Vear 

2003 2004 2005 

0.127 0.119 0.113 

105 $ 99 S 94 

17 $ 16 $ 15 

49 $ 46 S 43 

5 $ 5 $ 5 

5 $ 4 $ 4 

S 

S 

S 

S 

$ 

Announcem 

entVear 

2006 2007 2008 

0.107 0.104 0.102 

89 $ 86 $ 85 

14 $ 14 $ 13 

41 S 40 $ 39 

4 $ 4 $ 4 

4 $ 4 $ 4 

2009 2010 2011 2012 2013 2014 

0.101 O.LOO 0.098 0.095 0.092 0.0'10 

S 84 $ 83 $ 81 $ 78 :;; 76 $ 74 

$ 13 $ 13 S 13 S 13 $ 12 $ 12 

$ 39 $ 38 S 38 S 36 $ 35 $ 34 

$ 4 $ 4 $ 4 $ 4 5: 4 $ 4 

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

2.00% $ 2.10 $ 1.98 $ 1.87 $ 1.77 $ 1.73 $ 1.69 $ 1.68 $ 1.65 $ 1.62 $ 1.57 $ 1.52 $ 1.48 

21.0% $ 

1.2% $ 

$ 

3.7% $ 

22 $ 

$ 

$ 

4.29 $ 

4 .08% 

21 $ 

1 $ 

$ 

4.03 $ 

4.08% 

20 $ 

$ 

$ 

3.82 $ 

4.08% 

19 $ 

1 $ 

$ 

3.62 $ 

4.08% 

18 $ 

1 $ 

$ 

$ 

3.52 $ 

4.08% 

18 $ 

1 $ 

$ 

3.45 $ 

4.08% 

18 $ 

1 $ 

$ 

3.42 $ 

4.08% 

17 $ 

1 $ 

$ 

3.37 $ 

4.08% 

17 $ 

1 $ 

0.2 $ 

3.14 $ 

3.87% 

16 $ 

1 $ 

1.4 $ 

1.78 $ 

2.27% 

16 $ 16 

1 $ 

3.0 $ 3.7 

0.10 $ (0.72) 

$ 3 

0.13% -0.98% 

42.5% -:r-_~2--ii$~_~2--;;_---;2~$:-_...,2:---ir-_.,;1,.....:;$~_*1 ~$_----,;,.1 4$ _--:1~$:-_..,:1,.....;$r-_+-.;l$;......._~0~$_...:.,..,.,... $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ $ 0 $ (1) 

S 29,28 

$ 

$ 

$ 

$ 

2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.23% 

2 $ 

2 $ 

$ 

5 $ 

2 $ 

2 $ 

0.83 $ 

5.13 $ 

2 $ 

2 $ 

0.69 $ 

4.76 $ 

2 $ 

2 $ 

0.64 $ 

4.49 $ 

2 $ 

2 $ 

o $ 

4 $ 

2 $ 

2 $ 

o $ 

4 $ 

2 $ 

2 $ 

o $ 

4 $ 

2 $ 

2 $ 

o $ 

4 $ 

2 $ 

2 $ 

o $ 

4 $ 

1.31% 

$ 

2 $ 

o $ 

3 $ 

0.08% -0.98% 

o $ 

2 $ 

o $ 

2 $ 

(1) 

1 

o 

1 

$ (1.79) $ (1 .68) $ (1.59) $ (1 .51) $ (1.47) $ (1 .44) $ (1.42) $ (1.40) $ (1.38) $ (1 .33) $ (1 .29) $ (1.26) 

$ $ $ $ $ $ $ $ $ (0. 1) $ (1.2) $ (2.5) $ (3.2) 

$ (2) $ (2) $ (2) $ (1.51) $ (1) $ (1) $ (1) $ (1) $ (2) $ (3) $ (4) $ (4) 

$ 

$ 

$ 

3 $ 

$ 

1.00 

3 $ 

Y-4 

3 $ 

$ 

0.94 

3 $ 

3 $ 2.99 $ 

$ $ 

0.89 0.84 

3 $ 2.50 $ 

3 $ 

$ 

0.79 

2 $ 

2 $ 

$ 

0.74 

2 $ 

2 $ 

$ 

0.70 

2 $ 

2 $ 

$ 

0.66 

2 $ 

2 $ 

$ 

0.62 

1 $ 

o $ 

$ 

0.59 

o $ 

(2) $ 

$ 

0.55 

(1) $ 

(3) 

0.52 

(2)