I have changed the project structure asno suggested in Can't read ... AndroidManifest.xml - while attempting Android Notepad Tutorial - Exercise 1 and restarted android studio yet the problem persists. I have stopped using eclipse because R file is being generated inconsistently.
http://i1273.photobucket.com/albums/y410/sreeram_b93/what_wrong_zps57e75df9.png
EDIT: Earlier problem about opening android Manifest file has been solved by updating to 130.7 build.
New Problem: Cannot open or edit Layout Files Version: SDK Tools:22 SDK Platform:21 Android-studio Build:130.7