Question

Samantha enters a rent-to-own agreement for living room furniture. She will pay $ 70$70 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now? A. Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows 0 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 negative $ 70−$70 B. Date (Months) 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 C. Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 minus−$ 70$70 D. Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows negative $ 70−$70 0 0 0 0 0 0 0 0 0 0 0 negative $ 70−$70

Answer 1

The payment of rent is cash outflow for Samantha and since this is not investment there would be no cash inflow for her.

Also, the payment will begin one month from now, so today that is at 0, she need not pay anything.

At end of month 1 she would start making payment of rent.

The rent payment is $70 and its cash outflow hence would be represented by -$70 for 12 months.

Therefore, the correct answer is option A

Since in option A, the cash flow today is 0 and the cash flow for 1 to 12 is -$70 which should be the cash outflow for the 12 months rent.

Option B is not correct since does not show that cash outflow today would be 0 for her.

Option C is not correct since it shows cash outflow of -$70 today as well. However, the rent payment would start one month from now.

Option D is not correct since it does not consider cash outflow for intermediate months, it shows only cash outflow of $70 today and at end of 12 months which is not correct.