I would answer #2 and #3 as yes, and the M-Audio 24/96 sound card. Relatively cheap, easy to install, allows for direct bit-streaming. New is around $149, though ebay would undoubtedly do better than that.
The cheapest way to do what you're suggesting is to use Windows Media Player and the purchased sound card. WMP can rip the music to your hard drive, and provide the playback interface. My guess is that you'll get very good sound out of this setup. There are many threads on other tools for ripping / playing back, and all the benefits of getting away from WMP - many of the tools are free. Basically, all you need is some time to experiment and an internet connection, in addition to a way to generate a direct bit-stream feed out of the computer, and you're good to go.
The cheapest way to do what you're suggesting is to use Windows Media Player and the purchased sound card. WMP can rip the music to your hard drive, and provide the playback interface. My guess is that you'll get very good sound out of this setup. There are many threads on other tools for ripping / playing back, and all the benefits of getting away from WMP - many of the tools are free. Basically, all you need is some time to experiment and an internet connection, in addition to a way to generate a direct bit-stream feed out of the computer, and you're good to go.