A plant manager wants approval for a 25 crore new production line. How would you evaluate the proposal?
What the interviewer wants to hear
- Understand the strategic reason and alternatives
- Build incremental cash flows: capex, revenue or savings, operating costs, working capital, tax
- Calculate NPV, IRR and payback at the right hurdle rate
- Test key assumptions with sensitivities and scenarios
- Consider risks, capacity utilisation and post-investment review
Model answer
I would first understand why the line is needed: to meet demand growth, cut costs or replace old equipment, and what the alternatives are, such as outsourcing or upgrading the existing line. Then I would build incremental cash flows only: the 25 crore capex and its timing, extra sales or cost savings, extra operating costs like power and staff, working capital for more inventory, tax effects including depreciation, and any salvage value. I would ignore sunk costs and allocated overheads that do not change. I would calculate NPV at the company hurdle rate, IRR and payback. Then I would test the key drivers, especially volume and capacity utilisation, selling price and ramp-up time, because projects often take longer to ramp up than planned. Finally I would summarise risks, a recommendation, and agree a post-investment review to compare actual results with the business case.
Can you answer it under time pressure?
Take a timed medium round and get scored on every answer.
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