Albert, a recently retired teacher, has requested you to help him select one from the

following two proposals before him:

Proposal A: To establish and run a tuition home.

From the coming month, he could start tuitions for class $6$ students from a small vacant

building owned by one of his relatives, by modifying the same at a cost of Rs$\mathrm{.}5$ lakh.

Thereafter at the end of each year, from the first year, a fresh room would be added to the

existing building to offer tuitions to the students of class $7,8,9,10,11$ and $12.$ The estimated

all in expenses for the same would be Rs$\mathrm{.}4$ lakh at the end of the first year which would be

rising per year by Rs$\mathrm{.}1$ lakh. For all the years, the average net income per student would be

Rs$\mathrm{.}10,000$ per annum as reckoned at the end of the year and their strength per class would

be $20.$ Albert is assured of getting a bank loan for all his project expenses at an interest rate

of $15$ percent. Once the $12$th$-$class tuition completes its first year, Albert could sell the

tuition home to his relative and get cash compensation at twice the net annual school

income at that time.

Proposal B: Investment in commercial space

Hitech Builders, owned by one of his ex$-$students, are planning to start a commercial

building project and have made a special pre$-$launch offer of $500$ sft to Albert on the

following terms: A down payment of Rs$\mathrm{.}10$ lakh is to be made immediately and the same

amount to be paid at the end of each year for the next three years. The building would be

ready for the business in just one year and he could expect an annual rent of Rs$\mathrm{.}3\mathrm{.}6$ lakh by

letting out his space there. Moreover, from the beginning of the second year he would be

appointed as the Property Manager at an annual remuneration of Rs$\mathrm{.}120,000.$ An

annual increase of $10$ per cent could be expected in both the rent and the salary. At the end of the seventh year the commercial space could be sold back to the builders at

Rs$\mathrm{.}120$ lakh. Entire financing would be arranged by the builder through their bank at an

interest rate of $12\mathrm{.}5$ percent. Which of the above proposals, according to you, is financially

more attractive to Albert and why? Evaluate the proposals using NPV$,$ IRR and Pay back.

Make suitable assumptions, if required and state them clearly.