If Images folder is added in same project of its usage, this should work for you:
<Image Source="/Images/Folder-icon.png"/>
Or use Pack Uri specifically:
<Image Source="pack://application:,,,/Images/Folder-icon.png"/>
In case image resides in different project than current project where your XAML resides, you have to use more verbose definition of Pack URI where you have to specify the assembly name where image is added.
<Image Source="pack://application:,,,/Assembly;component/Images/Folder-icon.png"/>
Replace Assembly with actual assembly name where image is added into.
Also make sure Build Action is set to Resource for file Folder-icon.png.
UPDATE:
More verbose definition of Pack URI works in sample as well. Try this out:
<Image Source="pack://application:,,,/ClassLibrary1;component/Folder-icon.png"/>