Some basic problems in inventory theory: The financial perspective

The analysis of the standard economic order quantity problem from a financial perspective is proposed. The case of mixed financing (equity and debt) is considered and the results are compared with those stemming from the average cost approach. It is shown that no prediction about the result can be made. We solve completely the problem of finding the best financing policy. As the financial framework suggests to consider an infinity of inventory cycles, we investigate the effects on the solution of a more realistic finite truncation of the chain. We show that the finite chain solution is always smaller than the infinite chain one.