having played around with this a bit more now i am going to make it 2 menu items:
Choose a File to be Replaced...
Choose a File to Replace the Selected File...
1. Currently it's working kind of opposite way to what I'd expected. I suggested a file in music library is replaced by a new file, not vice versa. I'm afraid the suggested "2 menu items" could be confusing. I don't think "Choose a File to be Replaced..." option would be necessary at all.
2. If you agree with #1, confirmation window should state this will be replaced by that.
3. When right-clicked, "Folder (Replace)" should not be grayed out.
4. Personally I think inbox would work better than the file browser dialog. It's a pain to find the new source file's path every time with the dialog.