heres my two cents

"- how many times can I use a rag before throwing it out or washing it? can/should I wash these pink rags or just buy a block of rags?"

it doesn't really matter as long as its clean

"- how many times can I use a sheet of sandpaper? discard after each wet sanding or keep reusing?"

you should be able to feel if theres a difference in the roughness of the paper, i.e how well it sands. I use sandpaper over and over again as long as it still has grit to it.

"- how should I handle edges and underside of the hood? so far I've been trying to go to about 5mm around the underside of the metal."

for the underside of the hood you should try to find a spray can of the paint your using, its much much easier.

"- the place where I live, the owners have this mastercraft sander: http://reviews.canadiantire.ca/9045/0547193P/reviews.htm

I wouldn't use it on the wet sanding, but for the initial preping it sure was tempting. Anyone use it? Would it be worth using on the next panel I do?"

for the inital preping yes, but you should always end with a sanding block. Espessialy with areas that have body filler on them.

and definatly do not use an electric sander for wet sanding!!

hope this helps some