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 mon ey on the optimal ordering quantities and the maximum allowable shorta ge in a finite replenishment inventory system. The present value of to tal 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 m oney was investigated under given sets of values of inflation and disc ount rates. This study shows that the optimal order quantity and maxim um allowable shortage vary with the change in difference between infla tion and time discount. Computational results indicate that this effec t on the system becomes more significant with the increase of the diff erence between inflation rate and time discount rate.