Implication of risk adjusted discount rates on cycle stock and safety stock in a multi-period inventory model

Inventory management is a major area of study in the field of production management, and applications often result in major efficiency gains and service level improvements. Economists believe that inventory levels play a pivotal role in the onset of economic recessions. Nevertheless, financial theories have given only cursory attention to inventory factors. The goal of this research is to apply tools of financial economics to address basic issues in inventory management. A capital asset pricing model is developed and applied to determine lot size and reorder points from minimizing present value of total cost subject to risk adjusted discount rates.