In the context of IRRs and cash flows, how do high negative IRRs react to terminal period cash flows?

High negative IRRs indicate that an investment is experiencing significant capital losses relative to the initial investment, which leads to a strong negative return. When considering terminal period cash flows, which are the projected cash flows at the end of an investment's life, investments with high negative IRRs become highly sensitive to these cash flows.

This sensitivity arises because the calculation of IRR is essentially the discount rate that makes the net present value (NPV) of all cash flows (both incoming and outgoing) equal to zero. For investments with negative returns, if terminal cash flows increase or decrease, this can drastically alter the overall return profile. If terminal cash flows improve, they can offset some of the preceding losses, potentially leading to a less negative or even positive IRR. Conversely, if terminal cash flows decrease, this can exacerbate the negative returns, resulting in an even lower (more negative) IRR.

Due to this considerable influence of terminal cash flows on the overall IRR for investments that are already in negative territory, it is clear why such IRRs react highly sensitively to any changes in these terminal cash flows.