A DAC goes between a CD player and the preamp or receiver, and takes the place of the internal DAC in the CD player.
If you intend to use the DVD for music then fine, a DAC may or may not have a positive influence - see if you can borrow one first, and AB it using two inputs in the receiver. It all depends on what the quality of the DAC in your CD player is.
If using as a DVD (ie multichannel), then you're SOL, as all the DAC's are two channel.
No, it will not work for 5.1, 7.1, 10.1 or whatever, as the D to A decoding is done in the DVD player.
First step - try both the digital (coax or optical) outputs from the DVD to Denon, and the analog outputs. Rig them up so you can go back and forth, then you'll have a real-time comparison.