Cavallo Company acquired a tract of land containing an extractable natural resource. Cavallo is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the extraction will be completed in five years. Relevant cost
information follows: Land ................................................. $9,000,000 Exploration and development costs .................... $1,000,000 Expected cash flows for restoration costs ............ $1,500,000 Credit-adjusted risk free interest rate .............. 10% What should be the depletion charge per ton of extracted material?
a. $4.00
b. $4.37
c. $3.97
d. $3.60
B
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