AN ECONOMIC ORDER QUANTITY MODEL WITH A RANDOM PLANNING HORIZON

ABSTRACT

The Economic Order Quantity (EOQ) model and its variations have received a lot of attention by researchers for a long time. However, an infinite planning horizon in practice is of rare occurrence because of changes in product specifications and design or its abandonment or substitution by another product due to rapid development of technology. This paper studies an EOQ Model which relaxes the assumption of the infinite planning horizon. In addition, the discounted cash flow (DCF) approach is used to properly recognize the financial implication of the cash flows in an inventory analysis. We derive the general expression of the expected present value for the inventory carrying and ordering costs, and investigate the characteristics of the function for the exponential distribution.