Just ran into this tonight.. go figure.

Anyhow, I went into IIS, opened the web service folder, right click and add new virtual directory. The virtual directory is the alias name you want to refer to as from the //localhost/{some directory}. It prompts for the physical drive letter location where you could point to c:\SomeProjectPath.

Once you do that, try re-creating the project based on the {some directory} virtual alias you created.