When I installed my D1 shifter, I removed that entire cable all-together. A bit of a pain, but I didn't like just stuffing it out of the way if it wasn't going to be functional. Much cleaner install in my opinion.
The original hi/ low shifter using the cable you are referring to will be replaced by the d1 setup. If you are going the route of the d1 setup from a wrecking yard, you will also want to get the shifter lever on top of the transfer case as it is different than the cable mechanism (you will be switching from cable to lever) you will likely also need the rubber boot and its steel frame where the d1 lever comes through the floor. You will also need to modify the gear selector mounting plate by cutting it ( removing the cable lever and making room for the mechanical d1 setup.
Plan on a couple hours to do it properly. I did my 2000 all from the top through the hole in the centre transmission tunnel
When completed everything worked including the dif lock indicator light on the dash.