TL:DR Trust your gut, and ask if there are others ways to show your skills without spending hours working for free. :)
Here is my take on homework during interviews:
During the first interview, I ask if a "take home" assignment is going to be part of the interview process. If yes, I ask the depth/breadth of that assignment. Depending on the answer to that question and how much I want (or need) the job, I will either recuse myself from the interview process or I continue on.
I generally don't like to do take-home assignment that are going to take longer than a few hours, but if I really want/need the job and the take-home assignment is longer than that, I'll keep moving forward in the interview and talk to the hiring manager about the assignment:
--what skills are you looking to test?
--are there other ways I can highlight my skills without doing a 40-hour project?
--would they be willing to hire me at a reduced rate for the week that it's going to take me to complete the project?
I have walked away from interviews that required large take-home projects. The last one I walked away from was estimated to take a full week to complete (like a full 40 hours if not more), and I had to present my findings to the executive suite and the board. I was expected to present a one hour presentation and I needed to be prepared to answer questions and defend my ideas. I was going to have to sign an NDA to view their financials and their analytics. The project included a full product roll-out plan including customer interviews, financial models, competitive analysis, risks profiles and a new set of features. "Ah, no thank you. I don't know your product suite, I can't learn it in a week and you're not getting my ideas and suggestions for a full product plan for free"
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