Average Costs Versus Net Present Value

24 Pages Posted: 26 Aug 2006

See all articles by E. van der Laan

E. van der Laan

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management; Erasmus Research Institute of Management (ERIM)

Ruud Teunter

Erasmus University Rotterdam (EUR) - Department of Econometrics; Erasmus Research Institute of Management (ERIM)

Date Written: June 2000, 11

Abstract

While the net present value (NPV) approach is widely accepted as the right framework for studying production and inventory control systems, average cost (AC) models are more widely used. For the well known EOQ model it can be verified that (under certain conditions) the AC approach gives near optimal results, but does this also hold for more complex systems? In this paper it is argued that for more complex systems, like multi-source systems, one has to be extremely careful in applying the AC approach on intuition alone, even when these systems are deterministic. Special attention is given to a two-source inventory system with manufacturing, remanufacturing, and disposal, and it is shown that for this type of models there is a considerable gap between the AC approach and the NPV approach.

Keywords: net present value, average costs, inventory control, holding costs, remanufacturing

JEL Classification: M, M11, R4

Suggested Citation

van der Laan, Erwin A. and Teunter, Ruud, Average Costs Versus Net Present Value (June 2000, 11). ERIM Report Series Reference No. ERS-2000-47-LIS. Available at SSRN: https://ssrn.com/abstract=370846

Erwin A. Van der Laan (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Ruud Teunter

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 1 408 1523/9162 (Phone)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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