On the upside, previous projects work fine with the new library, so you can delete your old one to save some space once you know it's all working OK.
Kontakt 5 doesn't work with earlier library versions. With nine dual-layer DVDs to install, this not only takes ages (and makes Komplete 8 Ultimate's hard drive-based installation seem highly attractive) but also leaves you with a legacy sample-set eating disk space. To maintain compatibility with old DAW sessions, users have been encouraged to install from scratch the new library and retain the old library as well. One thing that continues to frustrate Kontakt users is the process of upgrading the sample library when a new full version is released.