I would buy new fabric and wash it in hot water with a little bleach to make it look used. I would cut the binding 3" wide and use a 1/2" seam so you would have plenty of fabric to cover the old edges of the blanket. My other idea would be to buy some polar fleece and use that for the binding. My grand babies love the softness of the polar fleece.

All done! Thanks for the advice everyone. I did stick with flannel for the new binding and used a half inch finished fold. From the stuff I took off, I was able to find a less worn part in the corner and used it for the patch. I'm pretty happy with the results. I'll be taking it back to the Mom tomorrow. Trying to add the picture, but ..... hmmmm, not working for me this time.

Etsy......