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Total cost of ownership

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The total cost of ownership (TCO) is the cost to buy something plus the cost to operate it over its useful life. The idea is to take into consideration the total cost that a business will incur to operate an asset, not just the upfront acquisition cost.

The operating cost includes maintenance, installation, implementation, downtime during installation/implementation, training required to use the asset, disposal, licensing and upgrades.

When calculating the operating cost, it’s important to adjust future costs to today’s value, taking into account value of the money and the timing of the costs. As well, you should subtract the salvage value at the end of the asset’s life.

More about TCO

Calculating the TCO is important when comparing capital investment options to gauge the best value. Businesses often make the mistake of ignoring TCO and focusing only on upfront costs when evaluating capital investments. For example, printer A may cost less to buy than printer B, but a lower cost of ink cartridge replacements may make printer B a much better value.

Also be sure to account for differences in the length of the asset’s lifespan. If printer A has a useful life of five years while printer B’s lifespan is 10 years, printer B will likely offer better value.

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