If I understand correctly, the M16A2 has a slightly greater effective range because of the longer barrel. In terms of game rules, a GM could adjust range and armor penetration accordingly. This is a an arbitrary (and perhaps innaccurate) example, but a GM could make weapon performance for the M4 and M16A2 equal at 100m and less. Over 100m, the M16A2 could receive slight range, damage, and armor penetration bumps.
The army's decision to replace the M16A2 with the M4 in combat units is that the modern battlefield (i.e. MOUT/CQB) is a lot smaller than it used to be when battles were fought across open fields. It's only taken most militaries a century to adjust to the increasing urbanization of the battlefield. The M4 is also easier for mechanized and airmobile troops (pretty much all combat troops, nowadays) to use because of its more compact size. As a GM, you could give innitiative bonuses to PCs using shorter weapons when conducting CQB operations.
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