A manufacturer is deciding whether to build a second factory. How would you evaluate the investment?

Is the current plant actually full, and on how many shifts? And is the extra demand under contract, or is it a forecast? I'd evaluate it in three steps. Each one only matters if the one before it holds. First, is the demand really there? A factory lasts decades, so I'd want to know how sure the extra volume is. Second, are there cheaper ways to make the extra units? They could add a shift, remove bottlenecks in the current plant or outsource some production. Those cost less up front and can be reversed if demand disappoints. Third, does the investment pay back? I'd set the cost of building against the extra profit each year, and test it at lower volumes, because a new plant brings fixed costs whether it's full or not. I'd start with demand, since it decides whether the other two steps matter. What do we know about the order book?

Is the current plant actually full, and on how many shifts? And is the extra demand under contract, or is it a forecast? I'll assume the client makes home heat pumps, the plant runs two shifts near capacity, and the growth is a forecast. I'd evaluate it in three steps. Each one only matters if the one before it holds. First, is the demand really there? A factory lasts decades, so I'd want to know how sure the extra volume is. I'd separate signed orders from forecast, and check whether competitors are adding capacity too, which could leave the market oversupplied by the time we open. Second, are there cheaper ways to make the extra units? They could add a shift, remove bottlenecks in the current plant or outsource some production. Those cost less up front and can be reversed if demand disappoints. A third shift adds output for the cost of wages, night premiums and maintenance. I'd ask how far that takes them. Third, does the investment pay back? I'd set the cost of building against the extra profit each year, and test it at lower volumes, because a new plant brings fixed costs whether it's full or not. Say it costs $60 million and can make 100,000 units a year at $300 of contribution each, with $10 million of fixed costs. Full, that's $30 million less $10 million, so $20 million a year and a three-year payback. At 60% full it's $18 million less $10 million, so $8 million a year and seven and a half years. So the decision rests on how full the plant runs. I'd start with demand, since it decides whether the other two steps matter. My hypothesis is to add a shift now and commit to the factory once contracts cover enough to carry its fixed costs, about a third of capacity. Can I see the order book and the forecast by customer?