What does a high discount rate indicate about an investment project?

A high discount rate signifies that an investment project is perceived to carry a risky profile. In the context of finance and investment, the discount rate is used to determine the present value of future cash flows. When the discount rate is elevated, it reflects the higher expected return that investors demand as compensation for taking on additional risk.

This approach indicates that there are greater uncertainties associated with the cash flows of the project, leading to the investor's need for a higher return to justify the potential risks. High discount rates are often applied to investments with volatile markets or uncertain outcomes, allowing investors to account for the possibility of loss or lower-than-expected returns. Thus, a high discount rate serves as an indicator of the inherent risks of the investment, highlighting the necessity for caution and more thorough risk assessment before committing to such an investment.