In Some Inventory Models, the Optimal Behaviour Occurs Where Ordering

question 54

Essay

In some inventory models, the optimal behaviour occurs where ordering costs and carrying costs are equal to one another. Provide an example of a model where this "rule" does not hold; explain how the model's results are optimal anyway.

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Definitions:

Net Present Value

The difference between the current value of cash inflows and the current value of cash outflows over a period of time, used in capital budgeting to analyze the profitability of an investment.

Required Rate

The minimum yearly earnings percentage necessary to lure individual or corporate investors into a specific project or security.

Payback Period

The timeframe required for an investment to generate cash flows sufficient to recover its initial cost.

AAR

Average Annual Return, which measures the average return on an investment over a multi-year period.