I will try to be more clear on each of these questions for you:
The User Registration Solution Pack does not utilize sha1 encryption for the passwords, so you would not want to setup the system with this. If you did you would need to update it to make it work with sha1.
No, it will not work with the sha1, it would need to be updated with SecuriyAssist to do this.
Updating the existing one in PowerStore or URSP would be about the same effort as creating a new setup with SecurityAssist. If you are comfortable with updating your PowerStore with Security Assist then that might be the way to go.
Yes, you can adapt it using SecurityAssist but there is no documentation that is specific to making this update in PowerStore.
There should not be any issue with using this in a subdirectory of your site so long as all of the include paths are retained and the files are uploaded to the proper locations.