Value one vending machine on a college campus with a DCF. Build its unlevered free cash flow from the snacks it sells, and say whether it is worth the price.

The machine is worth about Rs 8.2 lakh against a Rs 3 lakh cost, an NPV of about Rs 5.2 lakh. Sales of Rs 10.8 lakh give gross profit of Rs 4.32 lakh and EBITDA of Rs 2.82 lakh. After tax, with depreciation only as a tax shield, free cash flow is about Rs 2.27 lakh a year. The answer rests on 120 snacks a day: below about 67 a day the machine destroys value.

Walk down the same lines you would for a company, because a vending machine is a company with one product. Unlevered free cash flow is operating profit after tax, plus non-cash charges, less capex and less money tied up in working capital. UnleveredBefore any interest or debt repayment, so the value belongs to all providers of capital, not just the owner. means you ignore how Munchpal pays for the machine; a loan changes who gets the cash, not how much the machine makes. It is the same logic as asking what a rented-out flat earns before deciding whether to buy it with a home loan.

Sales are 120 snacks times Rs 30 times 300 days, Rs 10.8 lakh. A 40% margin leaves Rs 4.32 lakh of gross profit. Less Rs 1.5 lakh of restocking and rent, EBITDA is Rs 2.82 lakh. Depreciation is Rs 3 lakh over five years, Rs 0.6 lakh a year, so operating profit is Rs 2.22 lakh and tax is Rs 0.555 lakh. Add the Rs 0.6 lakh of depreciation back, and free cash flow is Rs 2.265 lakh a year. There is no further capex and no working capital, so that is the whole build.

Discount five equal years at 12%. The five-year annuity factor is 3.605, so the cash is worth Rs 8.16 lakh today. Against a Rs 3 lakh cost the NPV is about Rs 5.16 lakh, an IRR of about 70%, and the machine pays for itself in about 1.3 years. There is no terminal value: the machine is scrapped at year five, and assuming any resale value would be a guess.

Find the one input that decides it and flex it. The machine breaks even at about 67 snacks a day, so the forecast of 120 has a cushion of about 44%, but every other input is small next to it. Ask how 120 was estimated: a hostel of 500 students buying a snack every fourth day gives 125, which is plausible but untested. Then name the risks a banker would: the college can raise the rent once it sees the sales, a second machine down the corridor halves the volume, and the year is 300 days only if exams and holidays fall as assumed.

The interviewer is not testing vending machines. They are checking you can build free cash flow from first principles, keep depreciation in its place, and say which assumption carries the value. Close with that sentence.