A net present value approach for the evaluation of regular and special discounts for families of items

This paper examines order quantities for families of items when regular and special discount schedules are available, and the objective is to minimize the present value of the relevant cash flows. Because order quantities can be large when special discounts are available, traditional cost minimization models which ignore the effects of the timing of cash flows are less accurate than discounted cash flow models. This paper extends earlier research work in the literature which considers only two of the three main elements in this problem-families of items, special quantity discounts, and discounted cash flows. Four types of costs are identified-order cost, invoice cost, physical inventory carrying cost, and financial inventory carrying cost. The amount and the timing of the cash outflow for each cost are described. Regular discounts and two types of special discounts are considered. Regular discounts are schedules of discounts and breakpoint order quantities that are always available. The special discounts are an opportunity to order before a price increase, and a ‘sale’ or special one-time price reduction.