working on a consequence-free Macbook is like free lessons for taking care of my 2010 MBA
In my opinion, this is the key value to this repair project, and both the earlier answerers miss it. Both of their answers are right, as far as they go, but I don't think they follow your questions to their logical conclusion.
Dan is right, in that the expense of fixing this computer won't be recovered if you try to sell the computer - the computer is nine years old, and you wouldn't get much of a price even if it were in perfect condition. But what if you don't want to sell it? The replacement parts you're likely to use (hard drive/hybrid/SSD, optical drive, battery, case/keyboard) are readily available from iFixit and elsewhere.
rdklinc is also right, in that used replacement parts are widely available at low cost; the design hung around for years, so there's a huge installed base. Because of that, there are also supplies of new replacement parts available, especially batteries; I don't think I've ever paid as much as $25 for a new battery on eBay. Where s/he misses the point is in speaking about the A1181 MacBook generally, rather than about your specific Late 2006 generation.
There are some particular quirks you'll need to keep in mind when making decisions about this early MacBook:
- The total amount of addressable RAM is 3GB (2GB in one slot, and 1GB in the other). If you install 2x2GB, the computer will only see 3GB; the limitation is caused by the memory controller chip Intel was using at the time.
- The hard drive bus is SATA I (1.5Gbps), not SATA II (3Gbps) or SATA III (6Gbps). Many SSDs have difficulty downcycling speed from SATA III to slower speeds. iFixit has listed the drives I linked to above as compatible with your generation; I hope they've tested them to be sure. Crucial.com, a major SSD/memory manufacturer, lists their BX100 and MX200 SSD product lines as compatible with the Late 2006 MacBook; those drives are available in sizes from 120GB to 1TB.
- The optical drive bus is PATA (or ATAPI, if you like) - not SATA. You can't just swap your old SATA hard drive into the optical drive bay without using a PATA-to-SATA converter module.
- Fortunately, this model has USB 2.0. That's the only way you're going to get Bluetooth 4.0 on this computer - through a USB dongle like the Iogear GBU521 (a lot cheaper at Amazon). But there's a lot of chatter on various forums that BT4 dongles on older Macs don't enable modern OS X functions like Airplay and Handoff. What are you hoping to get out of Bluetooth 4 that the onboard Bluetooth 2.0 doesn't already do?
- A Core 2 Duo is a 64-bit processor, so it's still supported under all the modern variants of OS X: 10.8/Mountain Lion, 10.9/Mavericks, 10.10/Yosemite, and 10.11/El Capitan (released this morning). That said, its slow CPU, slow drive bus and limited RAM suggest that some of those OSes will be pretty slow. I run Mavericks on a Mid 2009 A1181 (2.13 CPU, 6GB RAM, 7200 HD), and it's not speedy. Still, it's serviceable.
I've owned and used several A1181 MacBooks, mostly of the later generations. They're tough machines, and cheap enough these days that you don't need to worry about them much. If you repair this one, you could certainly use it as a local file/media server, or a quasi-desktop; maybe keep it in the kitchen as a recipe display screen/music player. You can load Ubuntu on it, which will eliminate the OS X speed issues (while you take on the universe of Linux issues, of course). Or you can give it to a kid or older person who needs a computer; the fact that it's slow for you won't be an issue to someone who doesn't have a computer at all.
Even if you try to fix it and fail, I think your observation is very wise. You'll be making mistakes on a computer you don't depend on, so there's little risk to you. Working on the MacBook will tune up your skills, so you'll be more confident if you need to open your MacBook Air.
Here's a shopping list of relevant repair guides for the issues you've described:
MacBook Core 2 Duo Hard Drive Replacement
MacBook Core 2 Duo Optical Drive Replacement
Installing MacBook Core 2 Duo Dual Hard Drive
MacBook Core 2 Duo Upper Case Replacement
MacBook Core 2 Duo Lower Case Replacement
Good luck!
EDIT 2015.10.02: rdlinc makes a comment that this machine does not support OSes past 10.7.5, and it looks like s/he's absolutely correct and I am mistaken; the MacBook2,1 Core 2 Duo only supports 10.7.5, not 10.8-10.11. The earlier Core Solo/Core Duo MacBook1,1 was 32-bit only, and dropped out with 10.6.8, while support for current OSes didn't come in until the all-64 bit MacBook5,1 Aluminum. So the OP's original idea of loading Ubuntu in order to get current security patches seems to be a more practical alternative. My bad; sorry for misleading people.