What is total cost of ownership?

Total cost of ownership (TCO) is the full cost of an asset over the time you own it: purchase, installation, training, running costs, maintenance, downtime and financing, minus what it is worth at the end. It shows what an option really costs, not just what it costs to buy.

How do you calculate TCO?

Add the upfront costs, the yearly costs times the years you will own it and any financing interest, then subtract the resale or residual value. A $53,000 machine that costs $11,000 a year and sells for $10,000 after seven years has a TCO of $53,000 + $77,000 − $10,000 = $120,000.

What should a TCO include?

Everything that differs between the options: purchase price, installation or implementation, training, energy and consumables, licences or subscriptions, maintenance and service, downtime, financing, and the resale value. Costs that are the same for every option can be left out without changing which one wins.

Should I use a discount rate?

Use one when the options spread their costs differently over several years, or when finance will review the numbers. A discount rate turns future costs into today's money, so a saving in year 7 counts for less than a saving in year 1. For short periods or quick comparisons the plain TCO is enough.

What is the difference between TCO and ROI?

TCO tells you what each option costs to own; ROI tells you how much an investment returns compared with its cost. Use TCO to pick the cheapest of several options that do the same job, and ROI to decide whether an investment is worth making at all.

TCO Calculator

A total cost of ownership calculator for any machine, vehicle, software or equipment. Enter two or three options and the years you will own them; see which costs least over the whole period, per year and per hour of use, and the year the cheaper-to-buy option stops being cheaper.

The figures filled in are an example. Replace them with your own.

Comparison period

Years of ownership

Discount rate (% a year, optional)

Leave empty for a plain TCO. Enter your cost of capital to add a present-value TCO.

Units of use a year (optional)

Hours, miles, copies: gives a cost per unit.

Unit name

Option 1

Name

Purchase price or upfront cost ($)

Installation or implementation ($)

Training ($)

Running costs a year ($)

Maintenance and service a year ($)

Downtime cost a year ($)

Resale or residual value at the end ($)

Financing (optional, simple interest on the purchase price)

Interest rate (% a year)

Loan years

Option 2

Name

Purchase price or upfront cost ($)

Installation or implementation ($)

Training ($)

Running costs a year ($)

Maintenance and service a year ($)

Downtime cost a year ($)

Resale or residual value at the end ($)

Financing (optional, simple interest on the purchase price)

Interest rate (% a year)

Loan years

Total cost of ownership

Machine B costs least over the period, $18,000 less than the next option.

Machine A is cheaper to buy, but its running total passes Machine B in year 4.

Option	TCO	Per year	Per hour	vs cheapest
Machine A	$120,000	$17,142.86	$8.57	+$18,000
Machine BCheapest	$102,000	$14,571.43	$7.29	–

Running total by year

Year 0 is the upfront cost; the resale value is credited in the last year.

Year	Machine A	Machine B
0	$53,000	$68,000
1	$64,000	$75,000
2	$75,000	$82,000
3	$86,000	$89,000
4	$97,000	$96,000
5	$108,000	$103,000
6	$119,000	$110,000
7	$120,000	$102,000

What you type is not sent to ParrotNotes.

What total cost of ownership includes

Total cost of ownership (TCO) is everything an option costs from the day you buy it to the day you sell or retire it: the purchase price, installation or implementation, training, running costs (energy, consumables, licences, subscriptions), maintenance and service, the cost of downtime and any financing, minus what it is worth at the end.

The purchase price is often the smallest part. A machine that is cheaper to buy but uses more energy and needs more service can cost more over seven years than the dearer one, which is exactly what a TCO comparison shows.

How to calculate TCO

TCO = upfront costs + (yearly costs × years) + financing interest − resale or residual value.

The example in the calculator: machine A costs $50,000 plus $2,000 installation and $1,000 training, then $8,000 a year to run and $3,000 in maintenance, and sells for $10,000 after seven years: $53,000 + $77,000 − $10,000 = $120,000. Machine B costs $65,000 plus the same $3,000 to set up, $7,000 a year, and sells for $15,000: $102,000. B costs $15,000 more on day one and $18,000 less over the seven years; A, the cheaper one to buy, becomes the more expensive one in year 4.

At 2,000 hours of use a year, that is about $8.57 an hour for A and $7.29 for B. A per-unit figure (hours, miles, copies) is often the easiest way to show a buyer the difference.

Present-value TCO and the discount rate

Money spent in year 7 is worth less to a business than money spent today, because the cash could earn a return in between. Enter a discount rate (often the company's cost of capital or hurdle rate) and the calculator adds a present-value TCO: each year's costs divided by (1 + rate) to the power of the year, with the resale discounted from the last year.

In the example at 8%, the present-value TCOs are about $104,435 for A and $95,692 for B. Discounting narrows the gap because B's savings come later, but B still wins. For the full cash-flow view with IRR and payback, use the NPV calculator.

TCO in a sales business case

If you sell the option with the higher price, the TCO is your business case. Build it with the buyer's numbers: their hours of use, what they spend now on energy and service, what an hour of downtime costs them. A comparison built on your own assumptions is easy to dismiss; one built on figures the buyer gave you in discovery is hard to argue with.

Show the crossover year. "Ours costs $15,000 more and pays that back by year 4" is a sentence a buying committee can repeat.

TCO vs ROI

TCO compares what options cost; ROI compares what an investment earns against what it costs. Use TCO when the options do the same job and the question is which is cheaper to own; use the ROI calculator when the question is whether the investment pays for itself at all.

Results are estimates from the figures you enter. Financing is shown as simple interest on the purchase price; your lender's schedule, taxes and accounting rules can change the real figures.

A TCO only convinces a buyer when it uses the buyer's numbers.

Hours of use, what they spend now, what downtime costs them: those come out in the discovery meeting. Record that conversation in ParrotNotes and get the summary and action items, so the business case you build uses the figures the customer gave you. Free for 100 minutes of recording a month.

Get ParrotNotes free