Estimating Cycle Inventory-Related Costs in Practice

2 ESTIMATING CYCLE INVENTORY-RELATED COSTS IN PRACTICE 

When setting cycle inventory levels in practice, a common hurdle is estimating the ordering and holding costs. Given the robustness of cycle inventory models, it is better to get a good approximation quickly rather than spend a lot of time trying to estimate costs exactly. 

Holding cost is estimated as a percentage of the cost of a product and is the sum of the following major components  

Rf= risk-free rate of return (which is usually in the mid-single digits) 

= rate at which the firm can borrow money (related to its debt rating) t = tax rate 

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