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Price Uncertainty and the Effect of Capital Costs in a Point in-Point out Inventory Investment

Anders Thorstenson and Peter Hultman
Managerial and Decision Economics
Vol. 13, No. 5 (Sep. - Oct., 1992), pp. 389-397
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2487773
Page Count: 9
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Price Uncertainty and the Effect of Capital Costs in a Point in-Point out Inventory Investment
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Abstract

This paper analyzes a point in-point out inventory investment under price uncertainty. The optimal quantity is determined by maximizing the expected value of the investor's risk preference function, which is a function of profit. Using an exponential risk preference function, the adjustment in the optimal quantity stemming from a change in the interest rate is investigated. The main conclusion is that the sign of the adjustment depends both on how profit is expressed and on the type of price distribution applied. Contrary to what is assumed in conventional managerial control practices, a rise in the interest rate might lead to an increase in the optimal quantity when present value serves as a measure of profit.

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