Abstract
This paper presents two new economic order quantity (EOQ) formulations supplemented with net present value (NPV) approach. While NPV approach is broadly accepted as the most realistic framework in modelling inventory systems, the literature possesses rather contradicting results on the application. In this paper, we introduce a NPV based EOQ model for an inventory system with constant demand, under fixed ordering cost and linear holding and penalty cost assumptions. For this particular problem, Gurnani (1983) is the first to provide some results on NVP approach. His study is criticized by Kim and Chung (1985) afterwards. In this study, we show that the earlier works of Gurnani, and Kim and Chung are both flawed, and we provide the optimal formulations for both cost minimization and profit maximization objectives. Through an extensive numerical study, we demonstrate that classical EOQ model may lead to sub-optimal solutions without an embedded cash flow analysis. Meanwhile, we also show how EOQ models proposed by Gurnani and Kim and Chung deviate from optimality.
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