Some basic components to TCO.

 Purchase price
 Maintenance cost
 Repair cost

Case 1: Imagine that you are the business owner of a flower company. You are thinking of
purchasing a brand new flower delivery vehicle complete with refrigeration so the flowers
don't wilt during delivery. Instead of relying on just the purchase price when considering whether
to purchase this truck or not, you use the total cost of ownership. This cost includes not just the
purchase price, but also all related ownership costs such as insurance, registration,
maintenance, and repairs.
Question: Deciding on whether or not to purchase a new flower delivery truck with refrigeration,
let's look at what your total cost of ownership for this truck will be. For cars, TCO is usually
calculated over a 5-year period.
Purchase price of this truck = $120,500
Insurance cost for each year = $2,130
Maintenance costs for each year = $1,000
Expected Repair costs over the 5 years = $4,000
Registration costs for each year = $257
The TCO for this vehicle is:

 $120,500 + $2,130 * 5 + $1,000 * 5 + $4,000 + $257 * 5 = $141,435

Conclusion: TCO for this truck is way different than your purchase price.
Case 2:
To compare two hypothetical pumps: Pump A and Pump B. Using Graco’s formula for selecting
new equipment:
TCO = I + O + M + D + P – R
I = Initial Cost
O = Cost of Operation
M = Cost of Maintenance
D = Cost of Downtime
P = Cost of Production
R = Remaining Value
For simple analysis consider:
I + M – R = TCO

 Pump A

I = $10,000

M = $5,000

R = $2,000

TCO = 13,000

 Pump B

I = $20,000

M = $2,000

R = $10,000

TCO = $12,000

In this example, the TCO of Pump B is less than Pump A even though its initial cost was twice
as much. However, the gap is only $1,000, which is a slight difference.
On addition of a fourth variable, estimated downtime (D) of $50,000 per hour even though
downtime will likely be a lot more.
I + M + D – R = TCO

 Pump A

I = $10,000

M = $5,000

D = (3 hours at $50,000/hr) or $150,000

R = $2,000

TCO = $163,000

 Pump B

I = $20,000

M = $2,000
 D = (1 hour at $50,000/hr) or $50,000

R = $10,000

TCO = $62,000

$163,000 – $62,000 = $101,000

Pump B costs $101,000 less than Pump A, which is a much wider gap. The price gap becomes
wider with every variable that you add, giving you a clear choice for cost value.