Average Costs Versus Net Present Value

While the net present value (NPV) approach is widely accepted as the right frameworkfor studying production and inventory control systems, average cost (AC) models are morewidely 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 hasto be extremely careful in applying the AC approach on intuition alone, even when thesesystems are deterministic. Special attention is given to a two-source inventory system withmanufacturing, remanufacturing, and disposal, and it is shown that for this type of modelsthere is a considerable gap between the AC approach and the NPV approach