Why is 'this theatre is outside Khreshchatyk' not accepted if the dictionary hints say that 'на вулиці' means 'outside'?
It means "outside" as in "outdoors, not indors". The word "вулиця" can indeed mean "the area which is not indoors" but that's impossible when you have the name of a particular street right there in the sentence.
Цей театр .. на вулиці ("на вулиці" is inseparable, as if it was one word)
Цей театр... на... вулиці Хрещатик (This theater... [is] on... Khreshchatyk street)
In this particular sentence it's a coincidence. The hint is shown because hints are general, it shows all possible combinations :)