I'd probably go with a bigger screen, but you can definitely do it. A 1080p projector may be a bit out of the budget, but a 100" diagonal Carada screen with a Panasonic AX200U projector would be killer in a room that size.
That would be right around $2,000.
I would personally seriously think about making the 1080p upgrade with the Epson 1080UB, but if you are after home theater, and you can control the light in the room and install some directional lighting, then you can get one heck of a big image for that type of cash. Don't forget the lamp warranty!