Factories should not be located in densely populated areas.Why?

Your friend has answered correctly but I would like to add few more points in the answer-

Factories contribute a lot in all types of pollution i.e water, air, soil and noise pollution. They generate large amount of harmful wastes which can badly affect the health of individual, if not properly disposed off. Sometimes factories discharge their toxic chemicals in the nearby water bodies which affect the health of people as they use this water for different domestic purposes. So to avoid all these problems, factories should be planted far away from the residential areas.

@Nitin:- Good answer, keep contributing!!