Damping conclusion correct.
Actual values for damping will need to be played for each projectile type.
In actuality the damping caused by air-friction will be higher at greater speeds too, there will be a bit of fudging required here I think.

But we still want to keep the mass values correct to start with,
so that our 'correct' gravity gives them a 'correct' trajectory.

I believe the velocity rate is in quants per second, but Im no physics guru...
So the formula you have for it is correct.
BUT, if the velocity is in quants per physics-frame, we will need to multiply it my 'time_step'.
Once again, Im no physics guru, and I couldnt find an answer one way or the other in the manual.
But 800,000 does sound high, but I dont remember 800 * 100 = 800,000??