Total cost of ownership: what equipment costs after you buy it
The purchase price is only the first installment. Repairs, downtime, management hours and fleet aging add real costs throughout the life of each equipment.
The invisible cost of immobilising capital in equipment
Paying for an IT fleet outright seems like a cost-free option. There are no interest charges, no rental fees, and the equipment belongs to the company. But there is a cost. It just doesn't appear on any invoice.
Money immobilised in equipment is no longer available for what the company does best: stock, hiring, marketing, payment terms to customers. In economics, it's called the cost of opportunity. In practice, it's a simple question: what would this money have done if it weren't sitting idle in laptops?
In our simulator, this item is called the potential return on preserved capital. In this article we explain where the number comes from, how we calculate it throughout the contract and what it is not.
Quick summary
Capital immobilised in equipment is capital that is not working in the operation.
We use 9.3% per year: the average operational profitability of Portuguese companies, published by the Bank of Portugal.
We don't count the total value for the entire contract. Rentals go out month by month, so the return is calculated on the balance that remains available, with returns reinvested to earn as well.
It is not an interest rate nor a promise. It is an explicit assumption, always visible alongside the result.
The cost of opportunity, explained
A company that purchases 20,000 € of equipment on day 1 has no 20,000 € in cash on day 1. A company that rents the same equipment pays a monthly rental and keeps that capital available.
The difference is not just accounting. The capital that remained in the company can be applied to the operation itself. And a company's operation has, on average, a measurable return.
This is why comparing only the total rental payments with the purchase price is incomplete: it ignores what the preserved capital did in the meantime.
Why 9.3%?
The Bank of Portugal publishes, in the Financial Stability Report, the average operational profitability of Portuguese companies: the operating result (EBITDA) generated by each euro of assets. The most recent figure is 9.3% per year.
We chose this number for three reasons.
It is Portuguese. It measures companies like yours, not American averages.
It is public and verifiable. Anyone can confirm the source.
It is operational. It is not the return on a financial product; it is what one euro working within a Portuguese company generates, on average, in a year.
If your company has above-average margins, the assumption is conservative. If it has below-average margins, it will be generous. That is why, in our simulator you can change the rate or apply the conservative rule of ⅓, which assumes that only one-third of the preserved capital is actually reinvested in the operation. With that rule, the rate becomes 3.10% per year.
How we calculate throughout the contract
It would be easy to exaggerate this item: you would just assume that the total value generates returns throughout the contract. But it doesn't. In renting, rentals go out month by month, and the preserved capital decreases with them.
That is why we calculate month by month. The preserved capital starts at the total equipment value and decreases gradually until the end of the contract. Each month, only the balance still available generates returns.
And the returns are reinvested: what the capital generates in one month also generates returns in the following months, at the same rate (compound capitalisation). It is the standard practice in financial evaluation, and any spreadsheet can recalculate it in minutes.
An example
Equipment with a market price of 20,000 €, in a 36-month contract:
Base: each month the balance still available generates returns, with returns reinvested.
Calculation: 9.3% per year (0.775% per month) on the available balance, with monthly reinvestment, over 36 months ≈ 3,441 €.
In our simulator, this value appears as a deduction from the cost of renting, because it is a gain that the purchase scenario does not have. Under the same conditions, the real cost of purchase adds repairs, downtime and management. We explain this in the article on costs of ownership.
What this number is not
It is not a guaranteed interest rate. It is a national average applied as an assumption.
It is not financial advice. The decision about your cash is yours and your accountant's.
And it is not automatic. It assumes that the preserved capital is actually used in the operation. A company with excess idle cash will gain less from this effect. A company with its operation limited by cash, as is the case with many growing SMEs, will gain more.
Frequently asked questions
What is the total cost of ownership of a piece of equipment?
It is the real cost of the equipment over the period of use. It includes not only the purchase price, but also repairs, breakdowns, downtime, internal management, loss of productivity and technological obsolescence.
Why is it not enough to compare the purchase price with the total rental payments?
Because that comparison only considers direct payments. To properly assess purchase and Renting, it is necessary to include all operational and financial costs associated with each option over the same period.
What are the main hidden costs of buying equipment?
The most relevant costs include maintenance, repairs, unavailability, IT team time, loss of productivity and increased likelihood of breakdown as equipment ages.
What is the cost of opportunity of capital?
It is the potential return lost when capital is immobilised in purchase. In Renting, that amount remains available for cash or investments in marketing, inventory, hiring, technology, new products and business expansion.
What if the company has nowhere to apply the preserved capital?
In that case, the cost of opportunity will have less weight in the analysis. Still, the costs of repairs, downtime, management, productivity and equipment obsolescence remain relevant.
Does Renting eliminate all costs associated with equipment?
No. Some costs, such as initial setup and internal support, may exist in both models. A rigorous comparison should only account for costs that are actually reduced, transferred or eliminated by Renting.
Where can I see this calculation with my numbers?
In the renting simulator. The return on preserved capital appears as its own item, with the rate and source next to the result.