Why use ROI if I can use effective compount interest?
Yes though I'd likely put a caveat on that. If you take short-term investments and extrapolate the results to get an annual result this can be misleading. For example, if a stock goes up 10% in a month, assuming this will continue for the next 11 months may not be a great idea. Thus, beware of how much data do you have in making these calculations. When looking at long-term investments, the compound annual growth rate can be quite useful for comparison.
"Haha now there's two of you.  I have two twits parrot squawking in my ears in stereo.  Okay, so maybe you aren't from the US, in which case I can forgive your confusion and completely circular logic.  You must have gone back to Wikipedia or something, because the IS and LM curves are not, in your words, operating without ""control by powerful offices in government.""  The IS and LM curve indeed cross at a level that is consistent with an equilibrium between income and expenditure's equilibirium with the money market.  But that's just the label slapped on it, it's not determinative as some sort of naturally occurring law of economics in our society.  No, these things don't just happen on their own.  If what you're inartfully implying were true, then there would be no such thing as an expansionary or contractionary monetary policy.  Manipulating and controlling the money supply is the entire reason for the existence of the Federal Reserve!  What is wrong with you?  Go read a book or something on it, fuck me.  The Federal Reserve, by setting interest rates mainly, and by open market operations, and by less frequently changing the reserve requirements which directly controls the MONEY MULTIPLIER (you know, that thing that creates money out of thin air you seem to not be able to understand exists?) is constantly changing AGGREGATE DEMAND in the economy.  Aggregate demand is what the ISLM curve is about.  It's about the equilibrium between price levels and the level of economic OUTPUT DEMANDED.  But not supplied.  That's aggregate supply, and the Federal Reserve effects that less.  But yes, you've simply expanded the scope of things I could talk about that are fucked up about banks and the Fed in particular, because the Federal Reserve, in manipulating aggregate demand for money, actually is destroying money and the efficient use of money at the same time, because the LM curve in particular really represents the relationship between REAL income and the REAL money supply.  Real means not nominal, but in actual purchasing terms.  The Fed is manipulating an LM curve that at its base is a piece of logic built on the assumption that what's going into it are real numbers, and yet by definition, the Fed acting to manipulate it makes those numbers not determined by purely market forces, but also by the Fed.  That makes them less than real.  Basically the Federal Reserve pumps up artificial levels of demand in the economy, which lasts for a bit to generate growth numbers, but in the long term it simply results in inflation and a continually delayed (at least for now) reckoning where the artificial demand (i.e. the government's ability to borrow) cannot be further expanded, and something has to give.  This down the road would be a monetary crisis involving the US dollar being knocked off its perch as the world's primary reserve currency, and the yields on Treasuries skyrocketing to the point that the government is either forced to behave or else print so much money to actually cover interest payments on the debt that the flood of money into the economy causes catastrophic inflation.  But anyway, my point is that you're making a circular argument, because you're saying that the Fed doesn't interfere in or exert tremendous control over the economy, because there's something that we know shows the given price level of money in an economy called the ISLM curve, falsely implying that everything's fine with money because it's determined by mechanical, natural laws, almost like gravity, when in fact the Federal Reserve's whole purpose is to manipulate the inputs that go into that curve.  It reduces interest rates which artificially increases income.  It also increases the velocity of money, an input for the LM curve, by increasing nominal economic output, etc. etc.  The IS and LM curves are not these things that just sort of happen on their own.  This may come as a shock, but the US has a central bank which has as its sole purpose the manipulation of these curves.  Its central mandate is control of price levels.  Its unspoken mandate is to preserve the status of the big banks on the top of society, which is why the big banks created it in the first place, and why they own all the branches (this is the root fact behind why some people say that the Federal Reserve is in fact not federal and is instead privately owned, which isn't completely literally true, but true enough in the sense that it has a clear conflict of interest between the public good it's supposed to be upholding and the private interests of the banks that own its branches and exert control over the financial system, mainly through the New York branch). But that's not the whole story about the total money supply.  There's also the pyramiding effect of the money multiplier.  It's as if you're just pretending these things don't exist.  It's real, I assure you.  Banks create money out of thin air when they extend credit to you.  To pay the obligation to them, you use the real money you in fact earned through your own labor, or from some real asset you might have.  They get the better end of the deal, and almost all the money in the economy is spawned by this process, this insanely exorbitant privilege they have.  And yes, I have a problem with it." "&gt;Really? I kinda thought it had something to do with losing 2.6 million jobs in 2008. Now that's a lot of revenue gone! Oh also the bush tax cuts  All the more reason to keep increase spending by 5-10% a year, right? How about we create an envionment that yields more jobs rather than increasing the taxes of those left? Because that worked so well for social security originally supported by 5-10 employees per 1 receiving benefits, now it's only supported by 2 employees per 1 receiving benefits-- ultra sustainable!  &gt;So almost 10% of our deficit? I'd say that's a good start.   10% of our deficit, so 1/4th the amount of DEBT INTEREST we'll pay this year? A drop in the bucket either way. Spending is the real culprit.  &gt;I do agree we spend way too much on the pentagon, but pretty sure that went up a lot without our two unfunded republican wars.   And now we're in a half dozen active and secret conflicts; Afganistan, Pakistan, Syria, Libya, Eygpt. All the more reason for Obama to IMMEDIATELY remove us from those wars. But he hasn't he has expanded them. And our military costs keep going up. It's not about ""this isn't the right time to withdrawl"" it's about his corporate masters being the same as the Bush corporate masters telling him to continue. It's about oil/gas and the pipelines and projection of power that comes with it. Obama has continued and expanded the same policies as Bush, he cannot hide behind, ""Well Bush was worse"", he can't say that because it isnt true. Infact we're killing more peasants in other countries than ever before--- just with military industrial complex built drones.  &gt;There's also the unfunded Bush Medicare prescription drug plan.   Yep, that prevents the government from negotiating prices on prescriptions for a token  $10 Billion rebate, but which will yield $10 Trillion in revenues over the next 15 years. Sounds like a great ROI while the costs of drugs is skyhigh in the US.  So what did Obama do? He fed that industry another 30 million new customers without so much as any discount. The government purposely stays out of the negotiation of price. Why? Because the bill was written by insurance industry and healthcare industry executives like most bills are. Healthcare is nice, but its the COST of healthcare that is the issue. If the cost was more reasonable, you wouldnt even need insurance, but because they can charge $70 for a single pair of rubber gloves, when the market price on a BOX is $5-10 we can plainly see the cost of medical care in the US is bloated and we get much less than comparative countries.   Obama is just like Bush, he has enriched the various industries. The only difference between bush and Obama are which industries are enriched. You'll notice I didn't mention enrichment of citizens because they are an afterthought. Obama only needs to SELL the program to citizens, he sold it we bought it.  &gt;You can't seriously think putting those people back in charge will lead to good things.  No I don't think republicans or people like Bush or Romney are necessarily good for us either. The thing I have a problem with is that people like you think Obama is any different. He's not, new president, same as the old president. New speech writer, new cabinet (stuffed with corporate cronies and former lobbyists), but business as usual and marching orders from corporate and private masters." FYI...during the housing boom here in the US many people spoke about ever increasing home prices.  Many thought home prices could never go down.  Until they did. If it seems like it is impossible for home prices to continue to go up then they probably will stop going up at some point, although the rising prices can continue for a lot longer than you think possible. I'm wondering if Malaysia is feeling the effects of the US FED which flooded the market with US dollars after the crisis.  The Malaysian central bank holds US dollars as its foreign exchange reserves.  In order to keep the ringgit from rising against the dollar the Malaysian central bank will print up ringgit to purchase dollars which suppresses the value of the ringgit.  This has the effect of artificially lowering interest rates as ringgits become readily available leading to a boom - the boom being in real estate.  Just a hunch. Is the dinar in Kelantan getting much attention in Malaysia?  This is starting to make a little news here. It is a good enough approximation. With a single event you can do it your way and get a better result, but imagine that the $300 are spread over a certain period with $10 contribution each time? Then recalculating and compounding will be a lot of work to do. The original ROI formula is averaging the ROI by definition, so why bother with precise calculations of averages that are imprecise by definition, when you can just adjust the average without losing the level of precision? 11.4 and 11.3 aren't significantly different, its immaterial. "Look, as my final comment.  You're overthinking this.  Companies routinely have waaaay more cash on their books than they ""need"" because they keep a rainy day fund.  Yes, there are extreme examples like Apple that has about 60 billion more than they need but practically all companies are going to maintain excess cash for emergencies, acquisitions, etc.  As I said in another comment, the common theme between a DCF and an EV multiple is that they are both capital structure independent.    Even here there are going to be differences, companies with a really shitty capital structure (read: too much debt) will trade publicly at a lower enterprise value multiple because of the risk that they go bankrupt.  In an acquisition, this (probably) would not be the case.  In the case of a DCF, you would probably raise your discount rate to account for the risk of bankruptcy." You're 100% right! The IRR is the rate at which the project breaks even. You project cash flow/profitability metrics, and then you see what, under your projections, is the discount rate at which your project breaks even (the IRR).   But remember, it breaks even today! So it's saying that you should make a worthwhile investment today because the return that you will obtain at points in the future are worth you putting your investment in today! You still make a healthy return overtime if you project a reasonable IRR, but your IRR is showing you whether it's at least as worth it today to put your money in today (whether, given what you'll make over the future, it's at least as worth it to put your money in today). "The other answers have touched on amortization, early payment, computation of interest, etc, which are all very important, but I think there's another way to understand the importance of knowing the P/I breakdown. The question mentions the loan payment as ""cash outflow"". That is true, but from an accounting perspective (disclaimer: I am not an accountant, but I know enough of the basics to be dangerous), the outflow needs to be directed to different accounts. The loan principal appears as a liability on your personal balance sheet, which you could use, for example, in determining net worth. The principal amount in your payment should be applied to reduce the liability account. The interest payment goes into the expense account.  Another way to look at it is that the principal, while it does reduce your cash account, can be thought of as an internal transfer to the liability account, thus reducing the size of the liability. The interest payment cannot. Aside: From this perspective, the value of the home is an asset, and the difference between the asset account and the loan liability account is the equity in the house (as pointed out in different language by the accepted answer). Of course, precisely determining the value of an illiquid asset like a house at any given moment pretty much requires you to actually sell it, so those accounts are hard to maintain in real-time (the liability of the loan is much easier to track)." "The way I've implemented essentially ""value averaging"", is to keep a constant ratio between different investment types in my portfolio. Lets say (in a simple example), 25% cash, 25% REIT (real estate), 25% US Stock, 25% Foreign stock. Lets say I deposit a set $1000 per month into this account. If the stock portion goes up, it will look like I need more cash & REIT, so all of that $1000 goes into cash & the REIT portion to get them towards their 25%. I may spend months investing only in cash & the REIT while the stock goes up. Of course if the stock goes down, that $1000 per month goes into the stock accounts. Now you can also balance your account if you'd like, regularly selling stock (or the REIT), and making the account balanced. So if the stock goes down, you'd use the cash & REIT to purchase more stock. If the stock went up, you'd sell the stock, and buy REIT & leave more in cash."