I was considering purchasing a new Mac Mini as a way of upgrading my 2007 iMac. If this is not possible, I'll probably just purchase a new iMac. Any suggestions would be appreciated.
You won't be abble to use the iMac as a screen.
The Target Display Mode is only supported by iMacs since the late 2009 models.
You cannot use the IMac as a direct screen but you can use Remote Desktop to access other machines e.g. the new Mac Mini.
Remote Desktop will be a slower screen and I think does not remote audio.