Question

A company pays $20,000 for the rights to a well with 5 million gallons of water. If the company extracts 250,000 gallons of water in the first year, what is the total depletion in year 1

Answer 1

Answer: $1,000

Explanation:

The cost of the well is $20,000

The capacity of the well is 5 million gallons

The cost of one gallon is therefore:

= Cost of all gallons / Number of gallons

= 20,000 / 5,000,000

= $0.004

If 250,000 gallons were extracted in the first year, the depletion is:

= Number of gallons extracted * Cost per gallon

= 250,000 * 0.004

= $1,000