An analysis on production and inventory models with discounted cash-flows

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.