A small Texas firm purchased an oil well for 21 million They

A small Texas firm purchased an oil well for $21 million. They expect to extract 2,000,000 barrels of oil from the well. They extract 55,000 barrels in year 1 and 30,000 barrels in year 2. Their gross income is $3 million in year 1 and $2.9 million in year 2. What is the depletion amount ($$) for year 1? What is the depletion amount ($$) for year 2?

Solution

Depletion amount per barrel = 21 million / 2 million = 10.5 $

Toatal depletion amount at the end of 1 year = 10.5 *55000=577.5K $

Total depletion amount at the end of 2nd year = 10.5*30K = 305K$