The optimal investment in current assets for an operating firm occurs at the point where:

Question

Quizplus · Accepted Answer

The optimal investment in current assets occurs at the point where the total costs of holding current assets are minimized, which takes into account both carrying costs and shortage costs. This point is where the marginal benefit of holding additional current assets (reduced shortage costs) equals the marginal cost of holding those assets (increased carrying costs). At this point, the firm is balancing the tradeoff between the costs of holding too many current assets (high carrying costs) and too few (high shortage costs). Therefore, choice E is the best answer.

The Optimal Investment in Current Assets for an Operating Firm