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 because they can affect cash flows. For example, an increase in inventory will tie up cash and reduce available funds for other investments or expenses.

Since the Focus of Capital Budgeting Is on Cash Flows