Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.

Question

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Changes in noncash balance sheet accounts such as inventory are included in a capital budgeting analysis, as they can affect the cash flows of a project. For example, an increase in inventory means a larger investment in working capital, which results in a cash outflow.

Since the Focus of Capital Budgeting Is on Cash Flows