Determinants of Investment

According to Keynes, there are 2 indicators which help in deciding whether an investment must be made or not:
Marginal Efficiency of Investment: It refers to expected rate of return on an additional investment made. It is affected by factors like
(i) supply price i.e. the cost of producing a similar asset of that kind. It is the cost at which a new asset is purchased or replaced. For instance; if the cost of replacing an old machine is $500, then supply price= $500.
(ii) Prospective yield i.e. return; net of all costs that is expected from capital asset over the life of the asset. For instance; if the above machine is expected to get a revenue of $200 and the maintenance expenses are $100 then, the perspective yield= 200- 100= $100.
in our example MEI= (100/500)*100= 20%

Rate of Interest (ROI): it refers to the charge of borrowing for funding the investment. Higher the ROI, lesser the investment made and vice versa.