Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:7:46 PM
Ill WiFi 90
Suresh, 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 primary
school
From the coming month, he could start a LKG
class from a small vacant building owned by
one of his relatives, by modifying the same at a
cost of Rs.5 lakh. Thereafter at the end of each
year, beginning from the first year, a fresh room
would be added to the existing building to
house the students of KG, first standard,
second standard,, till the fifth standard. The
estimated expenses for the same would be
Rs.4 lakh at the end of the first year which
would be rising per year by Rs.1 lakh. For all
the years, the average net income per student
would be Rs.10, 000 per annum as reckoned at
the end of the year and their strength per class
would be 20. Suresh is assured of getting a
bank loan for all his project expenses at an
interest rate of 12 percent. Once the fifth
standard completes its first year, Suresh could
sell the school to his relative and get cash
compensation at twice the net annual school
income at that time.
Transcribed Image Text:7:47 PM bo
.illl WiFi
:
Proposal B: Investment in commercial space
Hitesh 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 650 sq ft. to Suresh on the
following terms:
He needs to invest Rs.10 lakh at the end of
each year with the first payment due at the end
of the same month. The building would be
ready for the business in just one year and he
could expect an annual rent of Rs.3.6 lakh by
letting out his space there. Moreover, from the
beginning of the second year he would be
appointed as the building supervisor at an
annual remuneration of Rs.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.120 lakh. Entire financing would be
arranged by the builder through their bank at an
interest rate of 13 percent.
Which of the above proposals, according to
you, is financially more attractive to Suresh and
why?
←
89
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