Okay, I'm replying my own topic which is a little embarassing, however I have encountered further problems.
I'm having problems with the component editor in SOPC Builder as mentioned above. I did further steps to attempt to rectify this solution of my "old design being stuck?"
I recreated the Nios II Processor System from scratch and interfaced with a brand new component as a slave peripheral which contains the modified pwm_module VHDL code. As I said before, the modified VHDL code contains an empty behaviour segment which is supposed to do NOTHING. However, after compiling this fresh new design, and did a full compilation, I was still getting the blinking lights on the LEDs.
Altera have emailed me to create a different component and rename it differently. I have done that and I was still getting the same results.
I even restarted the computer and reinstalled Altera and still no luck.
Can some one please give me any suggestions?! I've ran out of options...