Effects of inflation and the time value of money on order quantity and allowable shortage

This paper investigates the effects of inflation and time value of money on the optimal ordering quantities and the maximum allowable shortage in a finite replenishment inventory system. The present value of total cost incurred in this inventory system is developed first, then an optimal order quantity and maximum allowable shortage are obtained by using a search procedure. The effect of inflation and time value of money was investigated under given sets of values of inflation and discount rates. This study shows that the optimal order quantity and maximum allowable shortage vary with the change in difference between inflation and time discount. Computational results indicate that this effect on the system becomes more significant with the increase of the difference between inflation rate and time discount rate.