The determination of capacity expansion programmes with economies of scale

Abstract

For many production processes there are economies of scale with plant investments and certain operating costs. With long-term increases in demand this affects the timing and sizing of capacity expansion projects. This paper is concerned with the development of optimal expansion programmes. It applies dynamic programming models to minimize the present value of capita! costs, operating expenses and capacity shortage losses.

The paper considers homogeneous production capacity and heterogeneous plant where constituent units have different economies of scale arid working lives. The algorithm is applied to the analysis of an expansion programme for an integrated pulp mill.

The planning implications of such models are considered. Using sensitivity analysis, a number of variables such as discount rates, inflation effects and demand patterns are related to the economy scale factor. This indicates that the optimum capacity expansion schedule is sensitive to discount and inflation rates.