DAC is an acronym, standing for Digital to Analogue Converter. For the purposes of this post, I wont go into any more technical detail about what exactly "Digital" is (its not as straightforward as you would think!) and cut to the chase.
Your software will output a digital bitstream which gets sent to the sound card. Inside the card there is a chip which takes that bitstream and decides what that information means and outputs it as an analogue waveform.
The number of bits the DAC has is important as more bits = more levels = smoother output waveform. In order to make this even better, most DACs oversample - they take the bitstream and sample it again, hundreds of times. This has the effect of making the sidebands much further apart so a gentler reconstruction filter can be used. This increases the sound quality massively.
Cheaper DACs have poorer reconstruction filters, poorer error handling and a few other bits oand bobs that are noisier inside the chips themselves.
By outputting the digital stream untouched you can use an outboard DAC that is MUCH better than the one onboard. In this case, your sound card becomes largely irrelevant unless you are using optical
For £150, I would be looking at something like the Meridian 203 or DPA dac, both can be found on the bay for around the £150 mark. 203s are FAR more common than the DPA units.
