The term “lifetime cost” or “total cost of ownership” refers to the overall cost of a product, asset, or service over its entire lifecycle. This includes not only the initial purchase price, but also other costs such as maintenance, operation, upgrades, and even disposal at the end of its life.
The goal of assessing lifetime cost is to give a more comprehensive view of the costs associated with an asset or a product, rather than just considering the upfront purchase price. This can be particularly important when comparing options that have different upfront costs and ongoing costs.
For example, consider the decision to buy a car. The lifetime cost of the car would include the purchase price, the interest on any car loan, insurance costs, fuel costs, maintenance costs (like oil changes, tire replacements), repairs, and even the potential resale value when you decide to sell the car.
Considering the lifetime cost can sometimes lead to different decisions than considering only the upfront cost. For instance, a car with a high purchase price but low maintenance and fuel costs might end up having a lower lifetime cost than a car with a low purchase price but high maintenance and fuel costs.
It’s important to note that calculating lifetime costs involves making predictions about future costs, which introduces some degree of uncertainty into the calculation. For this reason, lifetime cost estimates should be used as one factor among many in making decisions about significant purchases or investments.
Example of a Lifetime Cost
Let’s consider an example using two different types of light bulbs: traditional incandescent bulbs and LED bulbs.
Suppose you need to buy a light bulb and you have two options:
- An incandescent light bulb costs $1 and lasts for about 1,200 hours.
- An LED light bulb costs $8 but lasts for about 25,000 hours.
Just by looking at the initial cost, you might be inclined to buy the incandescent bulb because it’s cheaper. But if you consider the lifetime cost, the decision might be different. Let’s assume you are planning to use the bulb for three hours a day on average.
With the incandescent bulb:
- You would need to replace the bulb roughly every 400 days (about 1.1 years).
- Over 10 years, you would need to buy around 9 bulbs, costing you about $9.
- If each bulb uses 60 watts, over 10 years, the bulb would use about 657 kilowatt-hours of electricity. If you’re paying $0.12 per kilowatt-hour, that’s about $79 in electricity costs.
- So, the total lifetime cost over 10 years for the incandescent bulbs would be around $88.
With the LED bulb:
- It would last for about 22.8 years at three hours per day, so over 10 years, you wouldn’t need to replace it.
- The LED bulb uses only 10 watts, so over 10 years, it would use about 110 kilowatt-hours of electricity, costing about $13.
- So, the total lifetime cost over 10 years for the LED bulb would be around $21 ($8 for the bulb + $13 for the electricity).
In this case, when considering the lifetime costs, the more expensive LED bulb actually turns out to be cheaper over the long run due to its longer lifespan and lower electricity usage.
This is a simple example, but it illustrates the concept of lifetime cost and how considering this cost can lead to different decisions than just considering the initial price.