Why does the nominal interest rate equal 25% in this problem, instead of 16.4%?
Keep in mind that nominal interest rate=Profit/Initial Amount.

The exact relationship that links real interest rate, nominal interest rate and inflation is $(1+R_{nominal})=(1+R_{real})(1+\pi)$ where $\pi$ is the inflation rate (Known as Fisher's identity)

$R_{nominal}=R_{real}+\pi$ is an approximation that works best when those variables are relatively small.