"Application Data" isn't a folder, but a Junction for backwards compatibility. A Junction is basically a short-cut for re-directing programs to a different location. By deleting that Junction, you'll break that function. For programs that are no longer installed, you can remove their entry safely.
No, it won't. Even if you follow Application Data to where it actually points to. For one thing your browser history for IE is stored in "C:\Users\USERNAME\AppData\Local\History" or for XP it's "C:\Documents and Settings\USERNAME\Local Settings\History". Just use CCleaner if you want to wipe this stuff out.
I see what the OP is trying to do now, there's nothing wrong with reinventing the wheel as long as you learn something from it. The only problem is that it's a little easier then you might have thought. You would use "ExpandEnvironmentStrings()": http://msdn.microsoft.com/en-us/library/windows/desktop/ms724265(v=vs.85).aspx to resolve the environment variables to their path. Also typing "set" with no arguments in the command shell will give you a list of the environment variables and their values for your current environment block. The ones that you would be most interested in are 'APPDATA', 'TEMP', 'TMP' and 'USERPROFILE' but check out the others while you're at it.