Separating the Cost of Capital from the Other Carrying Charges in a Discounting Formulation of the EOQ Problem

The standard EOQ problem is studied from a cash flow point of view. The present value of the stream of cash disbursements is minimised, where the discount rate is the cost of capital, ICAP, rather than the total carrying charge, I. The value of I, which is used in the EOQ formula, contains two terms, ICAP + ΔI, where ΔI represents the additional carrying costs such as obsolescence, handling, etc. The purpose of this paper is to derive a formula for the errors which accrue when the simpler EOQ approach is used.