If she had it stored away for that long before finally finding someone to gift it to, I would say that she doesn't want/need it back. If anything, you might risk offending her by telling her that you don't want her gift (this depends on the person ... you know your friend best).
My understanding is that you've thrown away the yarn that was truly ruined by moths, etc. and that the yarn you have left is usable but not of a type you care to knit with. If this is the case, then I would simply donate it to a person/organization you think might be able to use it ... maybe then at least someone will benefit from it rather than just throwing it away?