Obviously, don't go for the production environment. But I'm not sure why should that be on the cloud. I mean, if the idea is to try DB and code changes then I'd rather have a local development environment. Anyway, it is just a matter of taste I guess.
The process you mention seems relatively OK to me, assuming you're not using any fancy users integration and using the default Q2A-managed users:
- Step 1 seems OK. Bear in mind you won't be using a clean v1.7.4 but rather the one you were already using (if you have installed any plugin or made any core hack it will be there too).
- Step 2 seems also OK. Just a backup and restore should be fine.
- Step 3 seems unnecessary to me. You already have a productive site and a backup of that. You should be full of users and posts. If you want to start from scratch then this step is unnecessary (because the first user can be created as in the normal installation process) and also step 2 would be unnecessary.
- Step 4 seems OK. However, bear in mind you not only need to change the DB data but also any other configuration that you have made. Note you could have (directory) paths configured in that file pointing to the same location now. If that is the case, after you change them you'll also have to create them.
Or will just launching it from its location work?
It should work. The preferred site URL is only used for generating absolute URLs in Q2A. Nothing else. So most of the site will work even if that is not configured. Note, however, that some plugins actually use that setting for generating their URLs, which is inappropriate so those will surely point to your older instance.