We would like to set up locations for damaged material, and would like PRP to ignore these locations. Can this be done, and if not this way, is there another way to handle this?

You cannot make locations non-nettable, but you can set up a non-nettable warehouse. move the items into that non-nettable warehouse to have them ignored by MRP/PRP

can't remember specifics of where to set up in IV, since I have been working in 5c for the last 6 years.

The relevant flag is to be found in session tcmcs0103m000, form 2