Economic ordering policies under credit financing for deteriorating items with stock-dependent demand rate using discounted cash flow approach

Abstract

This study presents an economic ordering policy for deteriorating items with stock-level dependent demand rate in the presence of trade credit using the discounted cash flows approach. Mathematical models are derived under three different situations: instantaneous cash flows; credit only on units in stock; and a constant credit period. The main objective of this work is to minimize the present value of all future cash flows. The optimal solution is derived for finding the optimal cycle time and the present value of all future cash flows. Next, numerical examples are provided to validate the proposed models. Numerical examples show that there is significant difference in the values of optimal cycle time, order quantity, and present value of all future cash flows. Sensitivity analysis is carried out with respect to the variation of key parameters. Mathematica^® 5.1 is used to find numerical results.

Keywords:

• Credit financing
• deterioration
• stock dependence
• discounted cash flow
• inventory

JEL Classification:

• 90B05

Acknowledgements

The author is thankful to anonymous referees and the Editor in Chief for their valuable comments to improve the paper.