Question

If you go to H&R Block and get your refund of $1000 instead of waiting six months for the IRS to refund it to you, what effective annual rate of interest have you paid for this service if they charge you 10% of the refunded amount?

a. 37.17%

b. 11.11%

c. 22.22%

d. 88.16%

e. 23.46%

Answer 1

Amount of refund in 6 months is $1000   
10% deducted for payment today. I. e. $100      

Time = 6 months

Effective Annual rate of interest paid = (1+(Amount deducted/(Refund -Amount deducted))^12/no of months)-1      
(1+((100/(1000-100))))^(12/6)-1)      
0.2345679012   or 23.46%  
So, effective Annual interest rate is 23.46%