1. What exactly are the benefits of having a Dolby Digital encoder in my system (isn't a decoder necessary to get 5.1 audio)?
The benefit would be that all sound sources in your computer could generate a Dolby Digital 5.1 sound stream. This would allow games to do it, music to do it, etc... As encoding takes up a fair amount of CPU time, having a dedicated processor for it is helpful. As for decoding, that only matters if you are sending the signal to a separate system (external decoder box, home theater system, etc...) See answer below for more ...
2. My CNR card has three jacks: one SP/DIF, one labelled C/W, and another labelled R. What do each of these jacks do? Note that those labelled C/W and R are not SPDIF connections (I don't know what they are).
SP/DIF stands for Sony/Philips Digital Interface. I am assuming you have the COAX version rather than the optical. The optical is usually called TOSLink (Toshiba Link). The SP/DIF would allow you to send a raw signal to an external sound system, typically a home theater setup. Music would be encoded as PCM (Pulse Content Modulation I think) which is similar to the WAV format, which gives you stereo output. DVD's would send out an encoded Dolby Digital 5.1 (or even possibly a DTS) signal. Assuming the external sound system can decode them, you have no problem. The C/W is probably the Center/Subwoofer channel and the R is the rear channel. These are for sending 5.1
analogue signals directly to a speaker system, for example Klipsch ProMedia 5.1's. The front channel is probably on the motherboard up by all the PS/2, serial, USB, etc... ports. Oh and the actual plug types are the following: SP/DIF is COAX or RCA (interchangable), C/W and R are both 1/8" mini.
3. I heard that the SPDIF can be used to send an undecoded DD signal to a decoder, which then seperates the signal into 6 channels. Since the DVD already contains a "coded" DD signal, couldn't any sound card (not just high end) sport one of these? After all, isn't the SPDIF simply transferring an already coded DD signal to a receiver?
Yes, the SPDIF sends an undecoded DD signal to a decoder. Yes some sound cards out there are able to decode DD signals (I think the Audigy can amongst others).
4. I am asking this because I want to know how to get the most out of my nForce sound chip. It is currently plugged into an old HK amp via a stereo-to-RCA cable, which amplifies two floorstanding speakers. If I want 5.1 sound, what kind of speakers should I get, and where would I plug them in?
You have two options then. First, get computer style speakers that have the 3 mini plugs (again, Klipsch ProMedia 5.1, Logitech Z560's, etc...). Then plug in the appropriate connectors and there you go. Second, get a home theater receiver that supports at least DD 5.1 decoding and use the SP/DIF connector to send it the info. You would then hook up speakers to the receiver. These speakers would not be computer speakers.
No problem.
EDIT: small clarification
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