At present, the library has been built in a MP3 format; Cambridge upsamples to better quality..
Not really. MP3 works by throwing away bits of the audio it assumes you won't miss (this gets less and less true as you reduce the bitrate). Once that's done the quality is fixed - you can convert it to AIFF, upsample it, anything you like, but you can't put back what was taken out.
However it's always advisable to use as good an output path as you can. Though they are much improved on older models, Macs' analogue outputs inevitably have a certain amount of mucky noise; any digital output is to be preferred, and a high quality DAC will be able to produce lower jitter (errors in the timing of the sampling rate). However all this is in the interest of making the existing recording no worse: you can't ever actually make it better. (There are digital noise reduction techniques, applicable to hiss and to impulsive noise, but these are a conjuring trick: they always degrade the original signal, but the skill is in using them so that the trade-off in noise reduction makes it worth while. You can't remove distortion or the artefacting caused by over-compression.)
Thanks for yuor reply. You validated my initial understanding of how the system functions. Having said that, I will reload my music from the original CD's. What are the steps I should be taking to ensure that I get the best quality sound. Please understand, I have a MAC and will be buying a DAC and using, I believe, a software like audirvana (or something similar). Is this the best route to take? what would you suggest/advise? I typically listen to music from the CD to an amplifier to my speakers. I am a purist and this is my first foray into digital audio. I will never give up my original set-up but this will make life easier at times!
Basically what you are planning is the correct approach. Re-ripping your CDs will get you the same quality as the originals if you keep them as AIFF; and a good DAC will get the sound out of your computer onto your hifi. I can't advise on a particular DAC (you can go up to serious money for these but there are plenty available at a reasonable price).