| Abstract: | The appropriate size for a piece of fixed capital equipment (measured in units of capacity) depends on the anticipated demand for its services and on its cost. Using several models developed in the study of optimal inventory policy we derive the contribution to cost reduction that additional storage space makes under each of these models. Comparison of the sum of the discounted benefits (ie., reduced operating cost) with construction costs for additional storage space then yields the optimal size of the storage facility. |
