Why must the proceeds in the subdivision development method be discounted to present value?

Correct Answer

A) Lots sell over time, not all on the same date

Why this is correct: The proceeds in the subdivision development method must be discounted to present value because lots sell over time, not all on the same date. This sell-out period is called the absorption period. Money received in the future is worth less than money received today due to the time value of money and risk. Discounting converts future cash flows into their equivalent present value. Why the other choices are wrong: "Land is always worth less than the improvements" is a generalization, not the reason for discounting. "The method is prohibited without a discount rate" is not true; discounting is an integral part of the method's logic. "Discounting removes the need for a profit figure" is false; developer profit is still a required deduction. Exam tip: A longer absorption period increases risk and lowers the present value of the projected sales, thus lowering the indicated land value.