Suppose you are in a hurry to get your income tax refund It you man your tax ret

Question

Suppose you are in a hurry to get your income tax refund It you man your tax return, you will receive your refund in 3 weeks It you tile the return electronicallythrough a tax service, you can get the estimated refund tomorrow. The service subtracts a $50 tee and pays you the remaining expected refund The actual refund is then mailed to the preparation service Assume you expect to get a refund of $978 SHOW CALCULATIONS TO GET CREDIT a What is the APR write weekly compounding? b What is the EAR? k c. How large does the refund have to be for the APR to be 15%?

Explanation / Answer

a. Using a financial calculator to find the APR: PV = 978 – 50 = 928; FV = -978; N = 3 weeks; CPT I/Y = 1.765% per week; APR = 1.765 (52 weeks per year) = 91.76% b EAR = (1.01765)52 – 1 = 148.38% c. Refund (net of $50) needed for a 15% APR PV + 50 = PV(1 + (.15/52))3 PV = $5,761.14

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