Evaluation of capital costs in a multi-level inventory system by means of the annuity stream principle (Q1069421)

Some results obtained from applying the annuity stream principle for evaluating capital tied up in inventory and work-in-progress are presented. This principle departs from the cashflows associated with the production-inventory processes considered in contrast to traditional procedures by which the inventory value is determined from physical stock evaluated at costs incurred to date. In many situations it appears that the traditional procedure will underestimate the amount of capital tied up in production. In this paper the two principles are applied to a multi-level inventory system and the capital cost expressions and optimal order quantities are compared.