Xen should handle this scenario. As per your requirement, it looks like 20 VMs will share memory from 8GB memory pool. If the processes (in Xen instances) are memory intensive, then its going to be a real problem. Adding 12G of memory should not cost that much these days.

I haven't tried booting off the NFS. But there is a work around in Xen. You might have to rebuild kernel.

btw, how many cores do you have on the base machine?