Net Present Value Maximizing Inventory Analysis with Two Product Types and Credit Facilities

Abstract

The classic economic order quantity inventory model assumes that all items received from a seller are perfect in quality. Payment for the items is presumed made at the inventory cycle’s start, when the materials are received. This paper considers a system of inventory control where we receive two types of materials, perfect and less than perfect. In addition, a credit facility in paying for the raw materials exists. The percentage of perfect quality items is assumed to be distributed randomly. A case study illustrates the mathematical model showing the best order quantity.

Keywords: economic order quantity, imperfect quality items, continuous demand, cash discount, permissible delay in payment

JEL Classification: G30