The local police department is considering two types of sidearms for its officers. The Glock 40 costs $400 apiece and has a life of 5 years. The other option is a Sauer 45 that costs $800 and has a 10-year life. The Sauer pistol has a residual value of $200 at the end of its 10-year service life. Assume repeatability and compute the internal rate of return on the incremental cash flow of the two pistols. If the department uses a MARR of 5% per year, is the Sauer 45 the better choice? (6.5)
Question 6.Z: The local police department is considering two types of side...
The cash flows for the difference between the two alternatives can be set equal to zero to determine the IRR on the increment:
0 = −$400 + $400 (P/F, i^′, 5) + $200 (P/F, i^′, 10)
Solving yields i^′ = 6.44% per year. This is greater than 5%, so the Sauer 45 is the preferred choice.
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