An analysis on production and inventory models with discounted cash-flows. (June 2023)

• Record Type: Journal Article
• Authors: Ghiami, Yousef
• Is Part Of: Omega. Volume 117(2023)
• Publication Date: 2023-06
• Subjects: Inventory -- Production -- Objective function -- Discounted cash flow -- Net present value; Management -- Periodicals; 658.4005
• DOI: 10.1016/j.omega.2023.102847
• Languages: English
• ISSNs: 0305-0483

Abstract

Highlights: Net present value approach is an accurate framework to capture time value of money. In literature, a new method is being used to capture time value of money. There is no analysis on the theoretical foundation of this method. This method has some elements of both average cost and net present value approaches. Our analyses show that this approach is not accurate for many cases. Abstract: The objective function of an optimisation model is the main driver for obtaining optimal values for decision variables. An objective function that does not well represent an inventory or production-inventory setting might then mislead the decision maker. There are two well-established frameworks for constructing the objective function of inventory or production-inventory models in an economic context; namely the Net Present Value approach and the average cost/profit approach. In recent years, a variant of the Net Present Value approach has been introduced and used by researchers which is actually a combination of the two main approaches. The researchers, however, provide little justification for this approach and its analytical foundation. In this research, we compare this approach with the two known approaches both analytically and numerically. The results of our study show that, under some circumstances, the new approach significantly deviates from the other two in terms of the optimal values for the decision variables and objective function.