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Question 6.T-Y-S.G: The local police department is considering two types of side...

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)

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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\left(P / F, i^{\prime}, 5\right)+\$ 200\left(P / F, i^{\prime}, 10\right)

Solving yields i^{\prime}=6.44 \% per year. This is greater than 5 \%, so the Sauer 45 is the preferred choice.

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