Friday, May 19, 2006

A Cost Analysis Comparing the Purchase of Used vs. New Computers for Schools

Last week we received a request for bid from a public school district in the Midwest. We have dealt with them previously, and were impressed that they have created a "metric" for measuring the cost-effectiveness of purchasing used equipment versus new.

Here are the basic formulas and assumptions:
  1. Total Cost of Ownership (TCO) = (Unit Cost/Machine Life) + Estimated Yearly Repair Costs + Estimated Yearly Energy Costs
  2. Used PC Machine Life = 3 years
  3. New PC Machine Life = 6 years
  4. Estimated Yearly Repair Costs = (Estimated Yearly Failure Rate * Average Failure Cost)
  5. Estimated Yearly Failure Rate = 5%
  6. Average Failure Cost for a PC: with No Warranty = $100; with Onsite Warranty = $10; with Parts Warranty = $30
  7. Energy Costs = (Active Hours Per Year * Active Watts Used) + (Standby Hours Per Year * Watts Used) * Energy Rate Kwh / 1000 w/kw)
  8. Active Hours Per Year = 6 * 175 School Days = 1050 hours
  9. Standby Hours Per Day = 4 * 175 School Days = 700 hours
  10. Energy Rate kwh = $0.0820/kwh
There are three variables not addressed here. First, this formula assumes that a 3-year old machine's processor speed will perform adequately for the next three years compared with a new machine. We can conclude, then, that this formula is really for basic productivity machines running office application and the web, where that would be true. (There are other applications where a three-year old machine would just not have the processor speed to perform adequately, say for graphics or animation or the like.) Second, the formula does not address the operating system licensing issues, which are significant, but which I will address later. Third, this formula assumes that volume pricing would equally impact both products, but that may or may not be true.

So, an real-case example would be as follows. A new PC with a 3-year onsite warranty might calculate as follows:
  • New DELL Optiplex GX620, no monitor, 2.6GHz, 512MB RAM, 40GB Hard Drive, basic options, standard 280W power supply, three-year onsite warranty, educational pricing on Dell's website: $796.79
  • Used DELL Optiplex G260, no monitor, 2.0GHz, 512MB RAM, 40GB Hard Drive, basic options, 210W power supply, 30-day warranty, K12Computers.com price: $329.00
I took the lowest possible configuration available from Dell, and tried to compare it with a comparable machine that we sell. (There is a whole other discussion about how hard it is to actually order the lowest possible configuration, but since that relates to salesmanship and emotion, we'll assume for now that the buyer is willing to order the minimal specifications.) Now we can run our TCO formulas and compare.

New GX620:
  • The new GX620 repair cost calculation would be ((($10 * 3 years) + ($100 * 3 years)) * .05) / 6 = $2.75/year
  • The new GX620 energy costs calculation would be ((1050 * 280W) + (700 * 280W)) * $0.0820/kwh / 1000 = $40.18/year
  • The new GX620 TCO calculation is: ($796.79 / 6) + $2.75 + $40.18 = $175.73/year
Used GX260:
  • The used GX260 repair cost calculation would be (($100 * 3 years) * .05) / 3 = $5.00/year
  • The used GX260 energy costs calculation would be ((1050 * 210W) + (700 * 210W)) * $0.0820/kwh / 1000 = $30.14/year
  • The used GX620 TCO calculation is: ($329.00 / 3) + $5.00 + $30.14 = $144.80/year
So, based on the formula and posted pricing, the used computer proves to be a better value--a $30.93 savings per machine per year. That's 17.6% less than the new, or if you want to spin the numbers to best advantage, to purchase new would cost 21% more than new.

Now, I would like to say that this is good news, but the truth of the matter is that we haven't discussed licensing, and this is the first real rub. Because most used computers in any quantity are coming back from leasing companies, they never had or have not retained the original Windows operating system license media and manual. Microsoft has long claimed, and secured through legislation, that the Certificate of Authenticity (COA) affixed to a computer is not the actual the license to use the Windows operating system--to be legally licensed you have to have the original CD, the manual, the EULA (End User License Agreement), and the COA. Let's just say that this is complicated enough that most people (including me) don't understand it, and that it pretty clearly has the effect of not allowing the reuse of the original operating system on almost any used PC you would purchase. Windows XP Pro retail price is $299. Without drilling down too much, or discussing the Microsoft Authorized Refurbisher Program (which allows the re-licensing of a computer with Windows 98SE or Windows 2000, but not XP), let's just say that if a school district needs Windows XP on their computers, the cost of getting those licenses will significantly add to our calculated annual TCO--just how much depends on the discount pricing the school or refurbisher gets. Anywhere from $25 to $45 a year will be added to our calculations to cover XP. As it turns out, this district we have been discussing can use Windows 2000, which favors the reuse calculation.

We've also been very careful to compare apples to apples--the Dell Optiplex with itself. But another difficult issue for used computer refurbishers is that the Optiplex, while known for its quality and consistency, is not often compared with itself. More likely the price point for a quality refurbished Optiplex is being compared with the current sale pricing that Dell is advertising for their consumer-grade computers--which may be as much as half as much as the Optiplex pricing. Most customers are not nearly as sophisticated as this Midwest school district, and the idea of buying a refurbished Dell for $329 (without Windows XP) just doesn't seem right when Dell has some $359 special going that includes a flat-screen monitor.

This then becomes an exercise in explaining the big mystery of the used computers: why fewer than 5% of obsoleted computers actually make it to the marketplace in this country, and why there aren't many used PC dealers around any more. Good, consistent estimates are that something over 80% of used computers actually just get put into containers and shipped overseas, where licensing regulations are not as closely monitored and disposal practices are questionable. The rest, we can assume, sit in closets somewhere or are getting taken to the dump or recycled.
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