I've found that the outer sheath of this wire is damaged. Do I need to replace this wire before closing up the wall with drywall? I think the internal wires are still okay, but I'm unsure what to do next. Here's a link to the image for reference: https://imgur.com/a/1N1s0az
2 Answers
Honestly, why take the risk? The wall space is already open, so it’s better to deal with this now than to worry about potential fire hazards later.
You can either replace it or leave it as is, but if you’re using old Romex wire, also known as NM Cable, handle it with care. It’s typically copper wrapped in cloth and can become quite brittle. If it’s in good condition and hasn’t been disturbed, it should be fine. But if you can afford to replace it and the old Zinsco panel it's connected to, that might be the best move. Just keep in mind that it’s common for this type of wire to crumble if you start messing with it.

You mentioned it has a ground wire, but I agree that it can fall apart during repairs.