Is it possible to have multiple projects in only one workspace in Visual C++ 5? I thought that I should have one dll and one exe in the workspace so that I only need to compile the part of the engine that I have changed and not the rest. Is this possible, and how is it done?

It should be possible, atleast it works in VC6.
What you do is go to the File->New menu and in there you choose to create a new project be clicking the Projects tab, and then selecting the type of project. Then all you have to do is change to the option Add to current workspace instead of Create new workspace.

Yes it works in VC 5. Also, remember that when you add new projects you can set dependencies by clicking on Project, Dependencies. This was if you make a change to a base project it will automatically recompile any project which is dependent on that one.