Terje, I had to stop and try it before responding.
There is also a second line in dvd.sh containing "ac3":
        <audio format="ac3" lang="en"/>
Shouldn't also "ac3" in this line be replaced by "lpcm"?
 
No, apparently not --  I tested by changing it to both lpcm and pcm but apparently "dvdauthor" does not like that with the rest of the parameters.  I will look to see if I can figure out why.

If I do so, running the script results in
 
INFO: default video format is PAL
ERR:  Cannot parse audio option 'lpcm'
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dvd.mpg is created and looks ok with lpcm included

But the iso is empty!?
Yes, I got an empty iso too.