Two subdivisions have identical gross lot sales and identical costs, but one will sell out in three years and the other in six. What follows for their land values?
Correct Answer
D) The three-year tract indicates the higher land value
Why this is correct: The time value of money principle states that identical cash flows received sooner are worth more today. The three-year project generates the same total proceeds faster, reducing carrying costs (taxes, interest, overhead) and risk, thus indicating a higher present land value. Why the other choices are wrong: "Both indicate the same value, as totals are equal" ignores the time value of money. "The six-year tract is worth more for its longer run" is incorrect; a longer absorption period increases risk and cost. "Neither can be valued without a discount rate given" is false; the principle that faster absorption increases value holds true conceptually. Exam tip: In development analysis, faster absorption is almost always more valuable.
Why This Is the Correct Answer
Why this is correct: The time value of money principle states that identical cash flows received sooner are worth more today. The three-year project generates the same total proceeds faster, reducing carrying costs (taxes, interest, overhead) and risk, thus indicating a higher present land value. Why the other choices are wrong: "Both indicate the same value, as totals are equal" ignores the time value of money. "The six-year tract is worth more for its longer run" is incorrect; a longer absorption period increases risk and cost. "Neither can be valued without a discount rate given" is false; the principle that faster absorption increases value holds true conceptually. Exam tip: In development analysis, faster absorption is almost always more valuable.
More Land/Site Questions
Under which condition is the land residual technique most applicable?
Why can the same physical parcel carry different values in two assignments?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
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A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
Why does a developer's required profit rise for a longer subdivision project?
How does holding cost enter the valuation of land bought for future development?
Excess land is best described as land that has which characteristic?
Plottage value arises in which of the following situations?
Which of the following is an off-site improvement rather than a site improvement?
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