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8 May, 2015 - 11:50

Investment is determined by the rate of return from various possible projects and the cost of borrowing (or interest rate). The pattern of rate of return gives the demand for investment (also known of the marginal efficiency of investment): it is inversely related with interest rates. The cost of borrowing or interest rate is determined in the money market and is essentially the product of monetary policy.

Most companies determine their current investment plans with the help of long range planning and capital budgeting. Forecasts of future sales are the major determinants in these calculations.