I *believe* that you have the proper Project Preset. As I do not do AVCHD work, Paul_LS, or Steve will have to verify that 100%.
Now, for your Export/Delivery there are some considerations:
1.) If you edit your AVCHD footage in it's native state, the ultimate delivery would be BD for play on your 42" plasma TV. You would Burn the BD with the proper BD settings. Encoding will be handled there. (see below)
2.) If you deliver on DVD-Video, it will be down-converted to a DVD-compliant MPEG-2. One option that this gives you is having all of your editing done in HD, should you decide to later go to BD.
3.) Another possibility would be to choose a Preset for SD DVD-spec. material and let your camera do the down-converting to SD. This will speed up both the editing and the Burning to DVD. However, if you later decide to do an HD version of your Project, you'll be looking at starting pretty much from scratch and doing an HD Capture.
4.) In your particular delivery scheme, you will be using a software player, instead of a physical DVD, or BD. It is the file, and not a physical disc, that you will be using. That is about the only difference.
Unfortunately, I do not know which player/players come with Vista MCE. I would *assume* that it/they can easily handle a DVD-spec. MPEG-2 file (the same as Burned to a physical DVD disc, but without the pure DVD-Video structure - just the raw file, with no VOB, VIDEO_TS folder etc. That would allow the movie to play. However, the software player can *probably* also handle the full DVD-Video structure and allow for navigation, just like on a DVD hardware player.
I would *assume* that this OS might well have BD equivilent capabilities, as well. There, you would be Exporting to an MPEG-4 AVC or VC-1 format for HD playback. This would keep your delivery in HD (like your footage) and allow the best possible image in playback.
Those are just some rough thoughts. Others will have some very specific suggestions for your particular editing and playback schemes.