Total Cost of Ownership (TCO) is a comprehensive financial metric used to evaluate the total

cost associated with owning and operating an asset or system over its entire lifecycle. TCO
takes into account not only the initial purchase cost but also ongoing costs such as
maintenance, repairs, operational expenses, and even disposal costs. Let's calculate TCO with
an example:

Example: Suppose a fertilizer factory is considering the purchase of a new mixing machine
to blend various ingredients. The factory expects the machine to have a useful life of 10
years. The initial purchase cost of the machine is $100,000. The annual maintenance and
repair costs are estimated at $5,000 per year. Additionally, the annual operational costs,
including labor and energy, are expected to be $10,000 per year. After 10 years, the factory
estimates the disposal cost of the machine to be $5,000.

To calculate the Total Cost of Ownership (TCO), you'll consider the initial cost, annual
operating, maintenance, and repair costs, and the disposal cost:

1. Initial Purchase Cost (P): $100,000

2. Annual Maintenance and Repair Costs (A): $5,000 per year
3. Annual Operational Costs (O): $10,000 per year
4. Useful Life (N): 10 years
5. Disposal Cost (D): $5,000

Now, you can calculate the TCO using the following formula:

���=�+(�∗�)+(�∗�)+�TCO=P+(A∗N)+(O∗N)+D

Substitute the values from the example into the formula:

TCO = $100,000 + ($5,000 * 10) + ($10,000 * 10) + $5,000

TCO = $100,000 + $50,000 + $100,000 + $5,000

TCO = $255,000

So, the Total Cost of Ownership (TCO) for the mixing machine over its 10-year lifecycle is
$255,000.

In this example, the TCO accounts for not only the purchase price but also all the associated
costs of owning and operating the machine, including maintenance, repairs, labor, energy,
and disposal. This TCO figure provides a more accurate representation of the financial impact
of the machine on the factory's budget over its useful life. It can help in making informed
decisions about whether the investment is financially viable and which assets are the most
cost-effective options.