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.

average costs, holding costs, inventory control, net present value, remanufacturing
Business Administration and Business Economics; Marketing; Accounting (jel M), Production Management (jel M11), Transportation Systems (jel R4)
Erasmus Research Institute of Management
ERIM Report Series Research in Management
Copyright 2000, E. van der Laan, R. Teunter, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

van der Laan, E.A, & Teunter, R.H. (2000). Average Costs versus Net Present Value (No. ERS-2000-47-LIS). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/53