This plugin is designed to work with WP/XF whether they are in the same directory, separate directory, or even on separate web hosts. I should also clarify that this plugin can only be installed to self-hosted WordPress and not a WP.com blog. There are no limits to how many plugins you can install to WordPress, but just like here on XF you want to be careful not to install too many plugins that may cause technical headaches or site performance issues.
I think the best use case out of the box for XFtoWP is a simple blog with forum replies as comments, then build your site up from there.