A little more on the cancellation:
Producer John Nathan Turner had built his career around Doctor Who. At the time, even though he was badly burned out, he couldn't leave. The BBC couldn't get him to leave without offering him something else, and there was nothing to offer him.
The change in format from 24 episodes to 14 played havoc with the 4-story arc model. As a result, many stories that should have been 4 episodes were cut down to 3, with critical information/exposition ending up on the cutting room floor, where it did no one any good. (Greatest Show in the Galaxy (worst classic who ever) and Ghostlight are prime examples). Many of the episodes were written by very junior or brand new writers, so the quality wasn't always there. (One episode was only the second TV script the writer had ever done, and the other script was for a Medical Soap Opera.)
Sadly, many people blame Sylvester McCoy for ending the show, or ruining it, when the problems were well outside the actors' control. I though he established his Doctor very well, and has proved through Big Finish Productions that he was more than capable.
And then there's budget. The BBC was incredibly cheap. That the effects for Doctor Who were as good as they were is a testimony to the sheer brilliance of the people working for their FX department. Even so, it was still hideously expensive. Sadly, when there was a sudden reduction in cost of making those effects through improved technology, the show had already been cancelled, and the BBC bureaucracy didn't want to overcome the inertia to restart the show.
Internal BBC politics also played a role.
Rent the DVD for Survival if you don't own it already. Not a great episode (best parts of the script on the cutting room floor again), but the special features are very helpful in having different people explain what was going on as they saw it. In the end, I think it was all of the factors described.
I think it was particularly sad the John Nathan Turner was offered a show called Bergerac, and said he'd only take it over if he could recast the main actor and move the show to somewhere other than the island of Jersey. (For those that don't know it/haven't seen it, that's 95% of the show he wanted to change.)
And, as I've mentioned it several times,
Big Finish Productions is a company that really restarted Doctor Who about 5 years before RTD. Most of the stories are good to extremely good. There are some meh products as well, but for the most part, the company has risen above the challenge. Many of the best and more popular episodes of NuWho come directly from BFP's scripts. In fact, a lot of staff for NuWho also come from BFP. Small world.