12B-i

APPENDIX 12B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

OVERVIEW

TABLE OF CONTENTS

12B.1 INTRODUCTION AND PURPOSE.......................................................................... 12B-1

12B.2 MODEL DESCRIPTION ........................................................................................... 12B-1

12B.3 DETAILED CASH FLOW EXAMPLE..................................................................... 12B-4
12B-1

APPENDIX 12B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

12B.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.

12B.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 12.B.3).

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

Analysis Spreadsheet;

(2) Revenues: Annual revenues - computed by multiplying 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 compliance year of the standard, a one-time write-off of net 

property, plant, and equipment (PPE) assets to account for the book value of these assets 

that would have enjoyed a longer life if not for the standard;

(8) Standard SG&A: Selling, general, and administrative costs are computed as a percentage of 

Revenues (2);

(9) R&D: the GRIM separately accounts for ordinary research and development (R&D) as a 

percentage of Revenues (2);

(10) Product Conversion Costs: Product conversion costs are one-time investments in research, 

development, testing, marketing, and other costs focused on making equipment designs 

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

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

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

paid and taxes;

(12) EBIT as a Percentage of Sales (EBIT/Revenues): the 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), Product 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);
12B-3

(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;

(21) Capital Investment: Total investments in property, plant, and equipment are computed by 

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

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

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

(23) 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;

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

amount to be received in the future;

(25) Discounted Cash Flow: Free Cash Flows (22) multiplied by the Present Value Factor 

(24). For 2043 the discounted cash flow includes the discounted Terminal Value (23); and

(26) Industry Value thru 2043: The sum of Discounted Cash Flows (25).
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12B.3 DETAILED CASH FLOW EXAMPLE

Base Year

Standard 

Year

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit Sales 11.851 11.340 9.626 14.028 14.668 15.060 15.206 15.001 14.794 14.280 13.696 13.501 13.826 14.540

Revenues $ 1,820.7 $ 1,742.2 $ 1,478.8 $ 2,155.1 $ 2,253.5 $ 2,313.6 $ 2,336.0 $ 2,389.6 $ 2,356.6 $ 2,274.8 $ 2,181.7 $ 2,150.7 $ 2,202.4 $ 2,316.2

Cost of Sales

Labor $ 127.6 $ 122.1 $ 103.6 $ 151.0 $ 157.9 $ 162.2 $ 163.7 $ 167.5 $ 165.2 $ 159.4 $ 152.9 $ 150.7 $ 154.4 $ 162.3

Material $ 1,216.1 $ 1,163.6 $ 987.7 $ 1,439.5 $ 1,505.2 $ 1,545.3 $ 1,560.3 $ 1,596.0 $ 1,574.0 $ 1,519.4 $ 1,457.2 $ 1,436.5 $ 1,471.1 $ 1,547.1

Overhead $ 39.4 $ 37.7 $ 32.0 $ 46.7 $ 48.8 $ 50.1 $ 50.6 $ 51.7 $ 51.0 $ 49.2 $ 47.2 $ 46.6 $ 47.7 $ 50.1

Depreciation $ 61.4 $ 58.8 $ 49.9 $ 72.7 $ 76.0 $ 78.0 $ 78.8 $ 80.6 $ 79.5 $ 76.7 $ 73.6 $ 72.5 $ 74.3 $ 78.1

Stranded Assets $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Selling, General and Administrative

Standard SG&A $ 227.2 $ 217.4 $ 184.6 $ 269.0 $ 281.2 $ 288.7 $ 291.5 $ 298.2 $ 294.1 $ 283.9 $ 272.3 $ 268.4 $ 274.9 $ 289.1

R&D $ 40.2 $ 38.5 $ 32.7 $ 47.6 $ 49.8 $ 51.1 $ 51.6 $ 52.8 $ 52.0 $ 50.2 $ 48.2 $ 47.5 $ 48.6 $ 51.1

Product Conversion Costs $ - $ - $ - $ - $ 42.6 $ 59.7 $ 68.2 $ 3.5 $ - $ - $ - $ - $ - $ -

Earnings Before Interest and Taxes (EBIT) $ 108.8 $ 104.1 $ 88.3 $ 128.8 $ 92.0 $ 78.5 $ 71.3 $ 139.3 $ 140.8 $ 135.9 $ 130.3 $ 128.5 $ 131.6 $ 138.4

EBIT/Revenues 6.0% 6.0% 6.0% 6.0% 4.1% 3.4% 3.1% 5.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Taxes $ 36.9 $ 35.3 $ 30.0 $ 43.7 $ 31.2 $ 26.7 $ 24.2 $ 47.3 $ 47.8 $ 46.1 $ 44.2 $ 43.6 $ 44.7 $ 47.0

Net Operating Profit after Taxes (NOPAT) $ 71.9 $ 68.8 $ 58.4 $ 85.1 $ 60.8 $ 51.9 $ 47.1 $ 92.0 $ 93.0 $ 89.8 $ 86.1 $ 84.9 $ 86.9 $ 91.4

NOPAT $ 71.9 $ 68.8 $ 58.4 $ 85.1 $ 60.8 $ 51.9 $ 47.1 $ 92.0 $ 93.0 $ 89.8 $ 86.1 $ 84.9 $ 86.9 $ 91.4

Depreciation $ 61.4 $ 58.8 $ 49.9 $ 72.7 $ 76.0 $ 78.0 $ 78.8 $ 80.6 $ 79.5 $ 76.7 $ 73.6 $ 72.5 $ 74.3 $ 78.1

Change in Working Capital 0 $ - $ 2.3 $ 7.7 $ (19.9) $ (2.9) $ (1.8) $ (0.7) $ (1.6) $ 1.0 $ 2.4 $ 2.7 $ 0.9 $ (1.5) $ (3.3)

Cash Flows from Operations $ 133.3 $ 129.8 $ 116.0 $ 137.8 $ 133.9 $ 128.1 $ 125.3 $ 171.0 $ 173.5 $ 168.9 $ 162.4 $ 158.3 $ 159.7 $ 166.2

Ordinary Capital Expenditures $ (64.4) $ (61.6) $ (52.3) $ (76.2) $ (79.7) $ (81.8) $ (82.6) $ (84.5) $ (83.3) $ (80.4) $ (77.2) $ (76.1) $ (77.9) $ (81.9)

Capital Conversion Costs $ - $ - $ - $ - $ (2.0) $ (2.8) $ (3.2) $ - $ - $ - $ - $ - $ - $ -

Capital Investments $ (64.4) $ (61.6) $ (52.3) $ (76.2) $ (81.7) $ (84.6) $ (85.8) $ (84.5) $ (83.3) $ (80.4) $ (77.2) $ (76.1) $ (77.9) $ (81.9)

Free Cash Flow $ 68.9 $ 68.2 $ 63.7 $ 61.6 $ 52.2 $ 43.5 $ 39.5 $ 86.5 $ 90.1 $ 88.5 $ 85.3 $ 82.3 $ 81.8 $ 84.3

Terminal Value $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Present Value Factor 0.000 0.000 0.000 0.000 1.000 0.933 0.871 0.813 0.758 0.708 0.660 0.616 0.575 0.537

Discounted Cash Flow $ - $ - $ - $ - $ 52.21 $ 40.64 $ 34.38 $ 70.31 $ 68.34 $ 62.60 $ 56.32 $ 50.70 $ 47.04 $ 45.23

Industry Value thru 2043 $ 1,283.53

Cash Flow Statement 

STANDARD CASE SCENARIO

Industry Income Statement