If it's any similar to the hardware decoders on iPhones, they're probably limited to n streams. That might be good for playing some background music or ambient sounds, but it gets tricky really quickly when you have multiple sounds playing at once.
Not really: The Xbox has 320 independent decompression channels according to its marketing material, which is kinda powerful. The PS3 had similar tech in its Motion Decoder, but they didn't disclose how powerful it was.
And even if it had just a single decoder, there's always the possibility to pre-decode audio. Or just decode the music/film.
All the console versions shipped with compressed audio due to the anemic hard drive and disk speeds, as well as tiny RAM amount.
In general it doesn't make sense to use wavs. Games have been using compressed audio since the late 90s without any significant trouble, and mp3s are aurally transparant at 320kbps.
