EOQ and inflation uncertainty

Inflation uncertainty is introduced into a basic :EOQ model and its potenti al to make mischief is explored. Among other things, it is shown that even when the expected rate of inflation is less than the marginal cost of capit al, the appropriate discount rate to use in computing a discounted expected total inventory cost will not necessarily be negative. Therefore, the clas sic EOQ square-root formula may drastically underestimate the optimal lot s ize. The results may be generalized to the more complex inventory models. ( C) 2000 Elsevier Science B.V. All rights reserved.