choosing the optimal level of investment in each current asset type involves a trade-off between carrying costs and shortage costs.

Carrying costsare associated with having current assets and fall into two general categories:

1.The opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets.

2.Explicit costs necessary to maintain the value of the current assets.

If a firm offers longer credit terms to its customers, what will happen to its carrying costs?