Where does the DAC go?

If there is a digital output, the chances are that you might be able to improve upon the ROKU's internal DAC (not a far stretch to do as much, but just an educated guess on my part - I have no direct experience with ROKU to back up my assumption, but I think it's a fairly obvious conclusion). To use an external DAC you would run a wire from the ROKU's digital output, which would be one of several different types of interface (Most likely TOSLINK, RCA, or BNC - all of which are S/PDIF connections, the former is optical and the later two are coaxial). Yes, you would probably get better sound assuming you get a decent DAC.

Not that it really matters (OK, well it does), what would a "decent" DAC run me?

The internal DAC in a ROKU is like the one in an iPod in that it's cheap. If you're using any streaming media player for music into a hi-fi, then you will improve the sound by plugging the player into a half-decent external DAC.

The player requires a digital output to do this.

Then the DACs analog outputs connect to an input in your hi-fi.

I use a Cambridge DACMagic for my Apple TV and I'm quite happy with it. It goes for about $400.

1. You do not need another DAC.
2. It is possible that inserting one might improve the sound quality but......................

3. Until you tell us what the rest of the system is and what audio streams you are listening to, it is impossible to say whether adding a "decent" or "half-decent" DAC is going to make an improvement.

Gadgets for the sake of gadgets only make for clutter. There is a tendency on these forums for there to be recommendations based on the poster's personal history that do not necessarily apply generally. Everyone's situation is different.

Kal