Later I can delete all the project files and MTS files from my drive to free up space.
Later if my disc got scratched, or someone with a BD player wants a copy of the AVCHD or BD disc, I point MF7SE at the folder on my external drive and open the project and burn the disc. (If they have SD DVD I point to the folder after specifying DVD and MF7SE will compress and burn as SD DVD?)
Just to correct another conceptual error, you have already deleted the project and input files. So it is impossible to "point MF7SE at the folder ... and open the project and burn the disc". As Brian has pointed out, you can't even insert the Folder into MF, and it does not contain the project file in any case.
If the Folder is an AVCHD hybrid disc folder, it does, however, contain the edited sequence of AVCHD videos. The folder structure is a Blu-Ray type structure with a BDMV (or BDAV) folder, and below that a number of sub-folders, one of which is STREAM. The edited videos are all there numbered sequentially upwards from 00000.m2ts. If your intention is to convert these for burning to SD DVD, then these individual files would have to be inserted into the MF timeline and converted and burned. But of course if the hybrid disc contained a menu, that would have been converted to video too when the hybrid disc was made and would probably be the 00000.m2ts file. But it would no longer function as a menu on an SD DVD. You would need to discard it and start all over again with a new menu.
If you absolutely have to have an exactly identical back-up for possible later burning to SD DVD, you would need to make a separate DVD Folder or ISO at the time you made the original AVCHD or Folder.