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Most literature in the field of inventory management has not considered the time-value of money. This has happened partly due to the belief that the consideration of time-value has insignificant influence on the decision variables. During the last two decade, however, monetary situation of most countries has changed; this result in a sharp decline in the purchasing power of money. An inventory is usually a large portion of a firm''s asset. If it is not in storage, the asset can be invested elsewhere. Therefore, the consideration on the effect of time-value of money in inventory model is critical.
From the author''s literature search, none of the researchers simultaneously consider the time-value of money, the varying rate of deterioration and the price-dependent demand. This study improves on existing models to consider the above factors and develop three different models. The first model considers price-dependent demand when the inventory deteriorates over time at a varying rate when shortages in inventory are allowed. The time-value of money for various costs associated with the inventory system is also considered. The second model extends the first model to consider the production models with a finite replenishment rate. The last model extends the second model to consider the demand as a function inventory-level when there is a positive inventory.
This study applies the discounted cash-flows (DCF) approach for the analysis. The objective of the models is to maximize the total net present- value profit at the finite time span. A classical optimization technique is presented to derive the optimal inventory and pricing polices. Numerical examples and sensitivity analysis are implemented to illustrate the theory.
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