Total cost of ownership

The total cost of ownership is the initial acquisition cost of an asset, plus its subsequent operating costs. The concept is used in the evaluation of differing investment proposals. By using the total cost of ownership concept, one can achieve a better return on investment over the expected asset ownership period. The total cost may include the following:

  • Asset purchase price
  • Cost to install and test the asset
  • Cost to train employees in the use of the asset
  • Cost to maintain the asset
  • Cost to update the asset
  • Proceeds from sale of the asset

It can be difficult to properly estimate subsequent operating costs, especially when a business has relatively little experience in operating an asset and the operating period is expected to be lengthy. In this case, estimation errors are likely, and may result in the acquisition of an asset that eventually turns out to have been a more expensive option than other alternatives. Some organizations have such difficulty in estimating the total cost of ownership that they prefer to outsource work to asset owners or to engage in short-term asset leases where the underlying asset will be disposed of within a short period of time.

An additional concern is that asset acquisitions should not necessarily be made strictly based on the total cost of ownership. For example, an organization may be willing to pay a higher price for an asset that allows it to have more flexibility in the future, or which can be used to create higher-quality goods.

Related Courses

Capital Budgeting 
Financial Analysis