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 relevant in the analysis.

Question

Quizplus · Accepted Answer

Changes in noncash balance sheet accounts such as inventory can have an impact on cash flows, therefore they are relevant in capital budgeting analysis. For example, an increase in inventory may require more cash to be tied up in working capital, and a decrease in inventory may free up cash for other investments.

Since the Focus of Capital Budgeting Is on Cash Flows