I think if you create a custom installer (templates are in VS) you can have a lot more control over all of this, including creating custom prompts. If I understand correctly, you would like a single application build, but allow different config files to be downloaded yes? If thats the case then you could create a custom step in the wizard, prompt the user for their department (or whatever) and then provide custom code to download the appropriate .config file.
Using the installer will also enable you to set a static install path and end the madness! :)