Hello please help me answer these questions below : (first read the text)

1. Overview

Menuiserie AAA is bespoke carpentry located in Luxembourg, specialized in producing high-end fittings (cupboards, wardrobes, vestaires, kitchens etc.) for both the residential and office market. Founded in 2017, the company has grown very quickly, supplying primarily the local market but gradually international sales (mainly central Europe) had also become significant in the past two years. Overall, the company is focused on providing very good customer service and the high-quality workmanship and correspondingly charges premium prices for their products.

The company was started in 2017 by Jean-Claude Molitor, Jacques Meyer, and Guy Wagner. Molitor and Meyer both had 20 years of experience working in the industry while Wagner's family owned the land & buildings in which the company production facilities were installed (rented for a fee of 6,000 per month). Each shareholder owns 33% of the company, with Molitor and Meyer fully in charge of the management of the company, and Wagner having no input in company operations.

1. Current Operations

A key component of the Menuiserie AAA production line is the automated saws used for cutting materials (mainly wood but also aluminum, stone, ceramics, steel etc.). Laser cutters are generally cheaper and faster but limited to thinner materials, while water jet cutter can cut thicker materials such as stone, ceramics etc. You can read further aboutlaser cutting(Links to an external site.)

andwater jet cutting(Links to an external site.)

and how these are used in industrial manufacturing.

The company currently operated three saws, a laser cutter, a water jet cutter and a mechanical wire cutter (6days per week, two 8-hour shifts), which covered AAA needs by 55%, 40% and 5% respectively. The company had purchased a water jet cutter in 2017 for 245,000 and a laser cutter in 2018 for 405,000. The cutting capacity of AAA was ~850m2, and by summer 2018 AAA had grown so quickly that was already operating at or very near this capacity. This meant that production and timely fulfillment of orders was very sensitive to maintenance and technical problems, often resulting in needing to contract work to other manufacturers.

Molitor & Meyer estimated that the laser cutter was down for maintenance approximately 15 days per year and the water jet cutter approximately 20 days per year (thus ~10% of the time). This was something they not only wanted to eliminate but also make sure they had the capacity to (i) deal with outages and (ii) have the capacity to grow further. Molitor, who had followed a statistics course in University, was able to calculate that, based on historical AAA orders, in terms of m2that needed cutting, was adequately characterized by a normal distribution with a mean of 750m2and standard deviation of 200m2, but he was not sure how to make use of this data in his planning.

On average, AAA produced almost 7,000 in sales daily and maintained an average profit margin of 15 percent. However, outsourcing work had a big financial impact (additional costs such as transport and outsourcing costs) that not only took away the profit margin but also cost approximately 1,000 per day. In addition to the high costs of sending work out of its shop, AAA always took a big risk that the finished product might not be of the quality its customers had come to expect. From that perspective, therefore, there is a clear need to expand the production with additional cutting capacity but that meant new equipment, more staff, and a new location, as the current buildings did not have the necessary space.

Revenue growth was consistent and sustained and orders did not have a particular seasonality (evenly distributed throughout the year). International sales have shown impressive growth, doubling y-o-y in 2018 & 2019 and even in 2020 despite the coronavirus pandemic. In 2020, sales exceeded 2.0m and the domestic/international revenue split had reached approximately 80/20. The 2021 order book looked promising (see Annex for AAA income statement & balance sheet) but especially given the Coronavirus pandemic, how confident could AAA be of future order stability?

1. Expansion options

With customer demand increasing, Molitor and Meyer had discussed the need for new machines and were looking into the purchase of additional cutting capacity. For example, if AAA had owned a second laser or water jet cutter, they could eliminate the need to contract work out e.g. by operating the second machine during the night shift. They had researched the market and obtained relevant quotes for machines of similar capacity to the existing ones, and a laser cutter would now cost 700,000 and a water jet cutter 550,000. The bank supplying AAA with the loan to purchase the equipment required a down payment of 10% cent of the total loan and repayment over 4 years, with monthly payments of 20,000 for the laser cutter and 32,500 for both machines. Would the company manage to maintain a strong cash flow to purchase two machines, or could cash become a problem?

They estimated that a second laser cutter would eventually bring in additional revenue, but it would take a few years to reach this demand, so they estimated that the second laser cutter would be operating at only 40 percent to 55 percent capacity for the first couple of years of operations. If they opted to purchase a water jet as well, they were confident that both the new laser cutter and the water jet machines would operate at an average of 40 percent capacity the first few years after they were purchased, which included the sales AAA was currently losing when the original machines broke down. Both machines would be amortized using the straight-line method over a useful life of 10 years. The laser cutter would have an estimated salvage value of 75,000 and the water jet an estimated salvage value of 25,000.

AAA would also need to hire two additional employees if either one or both machines were purchased, a new machine operator, as well as a programmer, with annual salaries of 50,000 and 70,000. Both employees would work 40 hours a week for 48 weeks a year. AAA would also have no choice but to change locations if new machinery was purchased. After doing some research, Molitor and Meyer concluded they would need approximately 1,000 m2, regardless of whether AAA purchased one or two machines. Most landlords in the area charged 10 per m2per month, and moving costs were estimated at 150,000. If a new machine was bought, operating expenses (excluding management salaries, wages and benefits, and rent), as well as inventory and material costs would have to increase, proportionally to sales.

1. Potential Buy-out

Along with the needed expansion, Molitor and Meyer had been considering buying out Wagener. His original investment in 2017 had been very successful and he had never been involved in operations or in any company decisions. The success of AAA was therefore almost entirely attributable to the hard work of the employees and the decision of the company management. They were, therefore, ready to buy- out Wagener and already approached a lawyer to begin the process. This would involve agreeing on a valuation and making monthly payments to Wagener over a period of two years. But the liquidity of AAA needed to be properly forecasted; the company would need to support the current business operations (incl. financing payments), make regular payments to Wagener and having the necessary cash to make the machinery down payments. Molitor and Meyer, therefore, debated whether buying out Wagener while undergoing an expansion was too risky, given the current state of the industry.

THE question is to require a detailed analysis/evaluation of the available options (incl. cash-flow projections) and a clear recommendation to Messrs Molitor & Meyer

Thank you