Determining the appropriate target cash balance involves assessing the trade-off between:

Question

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The appropriate target cash balance is a trade-off between the benefit and cost of liquidity. While having a high cash balance provides more liquidity, it also incurs an opportunity cost as that cash could be invested elsewhere with potentially higher returns. On the other hand, having a low cash balance could lead to liquidity issues and potentially costly short-term borrowing needs. Therefore, it is important to find the appropriate balance between these two factors when determining the optimal cash balance for a business.

Determining the Appropriate Target Cash Balance Involves Assessing the Trade-Off