Estimates of each of the cost elements in the product or service life cycle will feed into an equation that calculates the preliminary TCO. Not all of the cost elements in the standard TCO equation will necessarily be relevant to a given product or service. For example, most services do not incur any warehousing and distribution cost, which means “W” will be equal to zero (0) in the resulting TCO calculation.
The following formula is a simplified approach to calculating TCO:
TCO = P + Present Value of (O + T + M + W + E — S)
where:
P = Purchase costs.
O = Operating costs.
T = Training costs.
M = Maintenance costs.
W = Warehousing and distribution costs.
E = Environmental costs.
S = Salvage value.
When evaluating competing alternatives, the scenario with the lowest TCO will be the best choice from a cost standpoint, subject to further strategic and client evaluations.
