Why might analysts use different discount rates for cash flows in a DCF analysis?

Analysts often use different discount rates in a DCF analysis to reflect the varying risk profiles of different projects. Each project may carry its own inherent risks based on factors such as its industry, the stability of its cash flows, and market conditions. Higher risk projects typically warrant a higher discount rate, as investors require a greater return to compensate for the additional uncertainty associated with those cash flows. Conversely, lower risk projects may use a lower discount rate, indicating a lower required return. This differentiation allows for more accurate valuation by aligning the discount rates with the specific risks of the cash flows being analyzed, ensuring that the present value calculations accurately reflect the expected risk-adjusted returns for each project.