I can think of two options, either deploy the app.config file and edit it using the XmlFile Element, or maintain multiple app.config files each representing your target environment, then deploy the appropriate file.
Here's an exmaple of both options, notice that I copy the file rather than just placing it on the file system. This serves two purposes, firstly you can see by the filename which one has been deployed, secondly if development.app.config and production.app.config are placed in the same location you will get an ICE30 validation error, by copying the file afterwards it avoids this error.
Notice also that I have a condition associated with the component, you'll need to decide how you identify which environment you are deploying to. Some ideas could be to use the machine name, the OU or simply pass it in on the command line as a property.
<Component Id="development.app.config" Guid="*">
<Condition>DEVELOPMENT</Condition>
<File Name="development.app.config" KeyPath="yes">
<CopyFile Id="development.app.config" DestinationName="app.config" />
</File>
<util:XmlFile
Id="WorkingDirectory"
Action="setValue"
File="app.config"
ElementPath="/configuration/appSettings"
Name="WorkingDirectory"
Value="C:\Working"
Permanent="no" />
</Component>
<Component Id="production.app.config" Guid="*">
<Condition>PRODUCTION</Condition>
<File Name="production.app.config" KeyPath="yes">
<CopyFile Id="production.app.config" DestinationName="app.config" />
</File>
<util:XmlFile
Id="WorkingDirectory"
Action="setValue"
File="app.config"
ElementPath="/configuration/appSettings"
Name="WorkingDirectory"
Value="\\prodserver\Working"
Permanent="no" />
</Component>