Case 022Operating cases and estimationCore
How would you value a factory? Value a moulding plant running at 70% on its earnings and on what it would cost to build, and say which should set the price.
1The situation
Shilpan Moulding Works owns one plastic moulding plant with capacity of 10,000 tonnes a year. It runs at 70%, 7,000 tonnes, and each tonne earns a contribution, selling price less raw material, power and other variable costs, of Rs 40,000.
Fixed costs, staff, rent and overheads, are Rs 12 crore a year. Keeping the plant running needs Rs 3 crore of maintenance capex a year, which you can take as equal to depreciation. Tax is 25%. Building an identical new plant today would cost about Rs 150 crore. Assume a buyer wants a 12% return and no growth.
2Your task
What is the plant worth on its earnings, what is it worth on replacement cost, and which should a buyer and seller use?
Quick check
The plant would cost Rs 150 crore to build new. Is it worth Rs 150 crore?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
On earnings the plant is worth about Rs 81 crore, little more than half its Rs 150 crore replacement cost, and earnings should set the price. At 70% it makes Rs 16 crore of EBITDA and about Rs 9.75 crore of after-tax cash, worth about Rs 81 crore at 12%. To justify Rs 150 crore it would need to run at about 97.5% of capacity. Replacement cost is a ceiling a buyer would never pay above, not a value.
Step 1What are the ways to value a factory?
Three, and an interviewer wants all three named before you pick one. What it earns, capitalised at the return a buyer wants; what it would cost to build again; and what it would fetch if broken up and sold. The first is the value, the second is a ceiling, the third is a floor. A second-hand car is worth what its service is worth to you, never more than a new one costs, and never less than its scrap value.
Step 2What is the plant worth on its earnings?
Build the cash from the tonnes. 7,000 tonnes at Rs 40,000 is Rs 28 crore of contribution. Less Rs 12 crore of fixed costs, EBITDA is Rs 16 crore. Less Rs 3 crore of maintenance capex and Rs 3.25 crore of tax, the owner keeps about Rs 9.75 crore a year. At a 12% return with no growth, that is worth Rs 9.75 crore over 0.12, about Rs 81 crore, or 5.1x EBITDA. The 12% is the buyer's required return, an assumption; say so and show what changes with it.
| Rs crore a year | At 70% | At 97.5% | At 100% |
|---|---|---|---|
| Tonnes | 7,000 | 9,750 | 10,000 |
| Contribution at Rs 40,000 a tonne | 28.0 | 39.0 | 40.0 |
| Fixed costs | (12.0) | (12.0) | (12.0) |
| EBITDA | 16.0 | 27.0 | 28.0 |
| Maintenance capex | (3.0) | (3.0) | (3.0) |
| Tax at 25% | (3.25) | (6.00) | (6.25) |
| Cash to the owner | 9.75 | 18.00 | 18.75 |
| Value at 12% | 81.2 | 150.0 | 156.2 |
Step 3Why is it worth so much less than it would cost to build?
Because of the fixed costs and the idle capacity. Every extra tonne adds Rs 40,000 of contribution with no extra fixed cost, so value climbs steeply with utilisation, but to earn 12% on Rs 150 crore the plant must run at about 97.5%. At 70% almost a third of the plant earns nothing, while the fixed costs are paid on all of it. When a plant is worth less than it costs to build, it is a signal: nobody should build new capacity in this market until prices or volumes rise.
Step 4So which number sets the price?
Earnings, bounded by the other two. A buyer will not pay more than about Rs 150 crore, because above that it would build its own and wait two years. A seller will not take less than the break-up value of land, building and machines. Inside that band the price is set by what the plant earns, with two adjustments worth naming: if the industry is short of capacity and utilisation is rising, value moves towards replacement cost, and a buyer who can fill the plant with its own volume can pay more than one who cannot.
Where candidates lose it
Candidates answer replacement cost, Rs 150 crore, because the question sounds physical. An interviewer then asks why anyone would pay Rs 150 crore for Rs 9.75 crore a year, and the answer collapses.
The second miss is valuing EBITDA without maintenance capex and tax. Rs 16 crore at 12% is Rs 133 crore, which overstates the plant by more than half.
What the interviewer asks next
- What is the plant worth if a buyer can move 2,000 tonnes of its own volume into it?
- How would you estimate the break-up value?
- The contribution per tonne falls to Rs 35,000. What happens to value?
- Why might a seller still argue for replacement cost?
Asked at Deutsche Bank, Generalist, New York, 2026 (Wall Street Oasis): There was one brain teaser that caught me slightly off guard, like how I would value a factory
Company names and figures are illustrative.