ZLC Seminar Series:”On the Cost of Capital of Deterministic Inventory Models”

Speaker: Alejandro Serrano
Work done together with Santiago Kraiselburd and Rogelio Oliva

Abstract
In the operations management literature, the financial risk in an inventory model is usually assumed to be captured by the (constant) weighted average cost of capital of the firm. This assumption is, at best, an approximation, since this cost depends on the risk of the cash flows, which, in turn, depends on the inventory policy. We study an inventory model with a generic inventory cost function where risk depends on the inventory decision made. We include additive and multiplicative financial noise functions to assess the impact of these on both the cost of capital of the firm and the optimal inventory policy. Notably, we find that risk is not in general a monotone function of inventory. As for the inventory policy, we find that the additive noise function is irrelevant to compute the optimal inventory level and that, even though the solution depends on the multiplicative noise function, the impact of this function is very limited for usual parameters.

Alejandro Serrano’s Bio