As an engineer, ham, and programmer I can assure you that you can do what you are proposing without too much problem at all. It would be a fun project and a great learning experience. I'd suggest the Duemilanove as an inexpensive platform with even much more capacity than your project will require. When you have finished the project you'll still have something you can use for the next one - and there will probably be a next one for you.
I'm not quite sure I understand with your question 4, however. If you are asking whether the arduino can be reused/reprogrammed the answer is yes. In fact unless you are a superb programmer you'll find yourself reprogramming yours over and over during your project's development.