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I am getting confused with how to find the future value in DCF analysis. When the discount rate (i.e risk, opportunity cost etc.) increases, why does the future value increase? Isn't it supposed to decrease if the risk increases? It would make sense if the rate of return increases, the FV increases, but rate of return and discount rate are used interchangeably.

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Basically, they're interchangeable, but sometimes you're pricing in today money and sometimes you're pricing in tomorrow money. Higher rate always equals higher return.

If you have $100 in a savings account at 5%, next year you'll have $105. The future value of your $100 is $105.

Bonds are probably the most common thing priced in tomorrow money, today you get a discount on money you'll receive tomorrow. Say you buy a $100 bond discounted at 5% you pay $95.24, next year you'll have your $100. Say this $100 bond had a rate of 6% (the discount rate increased), at this rate you'd pay $94.34.

So, something like discounted cashflow analysis you're considering today's value of money you expect to receive tomorrow.

  • I'm expecting to receive $100 tomorrow, what would I pay for it today?

  • I have $100 today, what should I expect to have tomorrow?

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