Sounds good. Doing it on a Decimila and protoshield is fine. Jordi's failsafe is a good idea, but make make it slightly more complicated, so my advice is to test the basic autopilot on a flight simulator first and only after it's working bother with the failsafe.
You mean RC simulators or standard flight simulators? I don't know any any good free RC simulators, but there are lots of free flight simulators, such as FlightGear and Xplane. We use those for hardware-in-the-loop autopilot simulations.
I'm afraid not. ArduPilot is designed for an plane with elevator, ailerons, rudder and throttle. You need at least one more channel to turn the autopilot on and off, and a sixth channel to turn the FMA Co-Pilot on and off.
Transmitters aren't expensive, so you should be able to get a six-channel one for $60 or so....
Yes, you can, but typically you'll want to tune its sensitivity in air with a proportional sixth channel. But even if you don't, you'll still need five channels, with the fifth to turn on the autopilot..