vijay0828,
I have a similar setup as you. I have a good PC with Studio 11 Ultimate, an HV20 camcorder and standard def DVD burner and player.
1. As far as I know, that is the best option. Those are the settings I use (except pcm instead of Dolby sound) for standard def dvds for friends and family. I have heard reports, but can neither confirm nor deny, that the results are better than using SD footage from the start. Sufficient for me is that I am comfortable it will be no worse.
2. Same as a dvd made with SD footage, a little over an hour typically. However, it has been reported that you can likely go over that somewhat by using automatic quality if necessary without noticing any quality loss. I have very seldom exceeded an hour and then I used double layer dvds.
3. Not that I know of.
4. Yes, upgrading will give you the ability to burn and view full HD quality if you have an HD TV. What equipment you need will depend upon your specific needs.
I have a PlayStation 3 which, besides playing games, will play AVCHD files and standard and BlueRay dvds. So, I output Studio 11 projects to AVCHD on standard dvds and play them in my PS3. Works great. The limitation is about 20 minutes of video on a dvd.
If you want more on a disc you will need to upgrade to a BlueRay burner and burn to a BlueRay dvd. And, you will need a PS3 or BlueRay player to watch the videos.
5. No problem with menus when burning SD dvds. Studio 11 does not burn menus to AVCHD dvds, they just act like titles. Supposedly this was one of the things fixed in Studio 12, but I cannot confirm.