Of course it makes a difference what you choose as your project setting!
Your project setting should match your source material. If you are using video from a miniDV camcorder, for instance, you should use the DV setting. If from an HDV camcorder, the HDV setting, etc. Using the incorrect project setting can mean a lot of extra rendering, and an occasional interlacing problem, later.
Your output settings are a different matter -- but your output can only be as good as your input. For instance, you can't output a hi-def video from a standard def video project. So, for output, you can go down in resolution but not up.
Specific to your Sanyo, you should only shoot video you plan to edit in Premiere Elements in full AVCHD -- and then use the AVCHD settings in Premiere Elements. Those hybrid videos your camcorder is capable of producing are only going to lead to problems with Premiere Elements.
As for AVCHD, the downside is that it's one of the most challenging consumer video formats in the world to edit! Because it is highly compressed hi-definition video, it takes a lot of power to work with it. Most people who are successfully working with it are using a quad core processors with 4 gigs of RAM. If your computer is less powerful than that, you may find a lot of performance challenges trying to work with AVCHD.