它 means "it", but it's not used nearly as much as the English word "it". Since this sentence begins with "That" not "It", I'd say the correct translation is 那 not 它.
Duo teaches us to use 这 and 那 (zhè and nà) instead of 这个 and 那个 (zhège and nàge), although it does accept both as correct answers. Which ones are used the most in which contexts?