Here’s a simple example. If you calculate the NPV for a hypothetical project , this is what you get:

One number. No information on anything else.

But if you add in your risk, the “project value” picture becomes so much richer:

Now you can see where your probabilities lie. If we just sum up the probabilities from the bottom, we can start answering important questions like, what’s the chance I’ll make more than $2M (example minimum hurdle rate)?

In this case, it’s about 60%. (The picture directly shows the complementary question: What’s the chance that I will make less than my hurdle rate?). But we could also conclude that this project has a 20% chance of losing money altogether, and about a 25% chance of making at least $5M.

That’s the power of financial risk analysis.