We are trying to design a room for an 8' screen. What size room would be the minimum size we should try for?
A general rule of thumb to serve as a starting point is that the distance from the primary seats to the screen should be ~ 2 times the screen width. With a high quality display (e.g. a projector or big-screen TV displaying a 720p or 1080i high definition image) you could go to ~ 1.5 times screen width. The closer you get, the more "involving" the experience, but the more you'll notice defects in the image, and therefore, the better the image quality must be in order to avoid the image faults from detracting from the overall theatre experience.
The other factor to take into account is acoustics. This isn't often considered, but it is very important to the overall experience. People are often tempted to put the largest possible screen in a room, and to put the seating up against the back wall of the home theatre. This is bad for acoustics -- you will not get good sound in that position, and it will result in muddy dialogue. If you do this, you'll probably find yourself constantly turning the volume up and down during movies as the sound effects alternately drown out the dialogue, or the dialogue sounds too soft. The ideal location for the primary seats in a home theatre is approximately 63% back from the screen. This means that in a 20 foot room, the seats will be just over 13 feet back from the screen, and you'll get a good combination of screen image size and quality with a screen 8 feet across if you're viewing a 720p or 1080i image.
Our HT was designed with all these factors in mind, as well as the number of seats we wanted. We have an eight seat setup, two rows, in a 14 x 19 foot room. We use a 720p projector, and sit 13 feet from a screen 8 feet wide. While watching DVDs, we occasionally notice pixels and screen-door effect, but generally the picture quality is quite theater-like.
If I was limited to a smaller room, I'd use a smaller screen. For example, sitting 8 feet back from a 5 foot wide screen in a 12 x 12 foot room would provide a very similar experience to our home theatre -- the screen would fill just as much as your field of view as in a larger theatre with the same ratios. (This is identical, for example, to a commercial theater in which you sit 80 feet from a 50 foot wide screen.) The only disadvantage in the 12 x 12 theater with a smaller screen would be fewer seats -- although some wouldn't consider that a disadvantage.