For example, if I bought a higher end Denon unit, it would come with a Burr Brown DAC. Am I correct to think that having a separate DAC like the M1 would be a waste? Along those lines, it seems that getting a high quality universal player like the OPPO 95 would make the DAC in the AVR irrelevant, although I'm not exactly sure what the relationship between the two devices would be and which DAC would supersede the other.
Can anybody please explain to me under what circumstance having a separate DAC would be useful, and what the relationship between the DAC in the OPPO, the DAC in the AVR and the DAC in the separate component is?
The sound quality in any high-end AVR is likely to be very good, although there are a few high-end units which I didn't care for much regardless of price. Likewise, the OPPO players have good sound quality as well.
However, it may not be good for what you're looking for, in the sense that our preferences are very individual. You may prefer the sound character/quality of an external DAC like the Musical Fidelity over that of your AVR. Whether or not it is worth the money depends on you though.
With respect to your last question, the sound character of any component performing digital-to-analog conversion will be a result of many factors, only one of which is the actual DAC chip used. So two units that use the same Wolfson, or TI, or AKG chip may sound very different because of how they are used and the surrounding implementation. In this situation, you have to choose between the one you like best.
If you had an OPPO, and AVR, and a standalone DAC, you would be choosing between using the OPPO DAC by using its analog outputs, the AVR DAC by using its digital inputs, or the standalone DAC by running digital into it and analog from it into your AVR.