For questions like “How much would you pay for XYZ?”, where XYZ is a product that can generate revenues directly for the buyer (eg dump, parking garage), you normally use valuation methods.
You will almost always have to use a DCF of the estimated cash flow (normally simplified with profit) of the object.
The revenues from the cash flow/profit equation depend on the object itself. If the revenue streams are not obvious you can clarify with the interviewer.
Examples of possible revenue streams:
- Dump ➜ Regulated payment from the government.
- Parking Garage ➜ Fees for using the garage.
If you have to estimate a bid price like for the dump, given this method will give you the maximum amount you may be able to pay, you could consider to:
- Bid a lower amount so that you will receive a return of investment comparable to the opportunity cost you may have (eg 10%).
- Try to estimate the possible bids of competitors (very difficult).
Alternatively, you may use the other valuation methods. But they don’t work well for very unique assets without real comparables:
- Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
- Computation from asset value – identify the equity value as the fair value of total assets minus net debt. This is normally going to give you the minimum price you could pay for the object, as it is considering the assets in isolation.
The other pricing strategies you mentioned (cost-based, value-based, competitor-based) are normally used instead when you have to define the price of products that can’t generate revenues directly for the buyer (eg a new pesticide or headache pill bought by the final customer).
Hope this helps,