NeroVision xpress2 setting help

Just 2 questions: CApture with DV .avi or mpeg-2 setting? Use LPCM or ac-3?

details below:

Capture questions when going from a DV Camcorder to pc via firewire.
Will be making home movies on DVD

Capture Choices are:
DV-Type 1 or 2 which makes large .avi files
or
DVD = .mpeg-2; 29.97 fps; 720*480 which is much smaller files

Is there any reason to go with the larger .avi format or is it fine to use .mpeg-2?

Also: mpeg-2 has audio options of:
LPCM
or
Dolby digital (ac-3) 2.0

Which to choose & why?

Thanks!
Susan