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 hidden cost of immobilizing capital in equipment
Paying for an IT park upfront seems like a cost-free option. There are no interest rates, no rents, and the equipment belongs to the company. But there is a cost. It just doesn't appear on any invoice.
Money immobilized in equipment is no longer available for what the company does best: inventory, 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 tied up in laptops?
In our simulator, this portion is called the potential return of preserved capital. In this article, we explain where the number comes from, how we count it throughout the contract, and what it is not.
Quick summary
Capital immobilized in equipment is capital that is not working in the operation.
We use 9.3% per year: the average operating profitability of Portuguese companies, published by the Bank of Portugal.
We don't count the total value for the entire contract. The rents come out month by month, so the return is calculated on the balance that remains available, with the results reinvested to generate returns as well.
It is not an interest rate or a promise. It is an explicit assumption, always visible alongside the result.
The cost of opportunity, explained
A company that buys 20,000 € of equipment on day 1 is without 20,000 € of cash on day 1. A company that rents the same equipment pays a monthly rent and keeps that capital available.
The difference is not merely 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 rents 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 operating profitability of Portuguese companies: the operating income (EBITDA) generated by each euro of assets. The most recent value 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 from a financial product; it is what one euro working within a Portuguese company generates, on average, in a year.
If your company has margins above average, the assumption is conservative. If it has margins below, it will be generous. This is why the number is always visible alongside the result, never hidden within the calculation.
How we count it throughout the contract
It would be easy to exaggerate this portion: we would just assume that the total value generates returns for the entire contract. But it doesn't. In renting, the rents come out month by month, and the preserved capital decreases with them.
So we count month by month. The preserved capital starts at the total value of the equipment and gradually decreases until the end of the contract. In each month, only the balance still available generates returns.
And the results are reinvested: what the capital generates in one month also generates returns in the following months, at the same rate (compound capitalization). It is the standard practice in financial assessment, and any spreadsheet can recalculate this in minutes.
An example
Equipment with a market price of 20,000 €, in a 36-month contract:
Base: in each month, the balance still available generates returns, with the results 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 that part 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 cash flow 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 operations limited by cash flow, like 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 its period of use. It includes not only the purchase price, but also repairs, breakdowns, downtime, internal management, loss of productivity, and technological aging.
Why is it not enough to compare the purchase price with the total rents?
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 failure as equipment ages.
What is the cost of opportunity of capital?
It is the potential return lost when capital is immobilized in the purchase. In Renting, that amount remains available for cash flow 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 aging of equipment 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 account for only the costs that are actually reduced, transferred, or eliminated by Renting.
Where do I see this calculation with my numbers?
In the renting simulator. The return of preserved capital appears as its own item, with the rate and source shown alongside the result.