Alec,
I'll be curious to what CS says, to be honest, I see no issue with your choppy playback on my system for what PD is doing. All I see is that for every 6 frames of original footage, a frame needs to be dropped to get to 5 frames for your 1.2 speedup. So for each sec of video at 25fps, you need to drop just over 4 frames. In regions where the car has traveled a reasonable distance per frame, dropping one of these frames makes things appear choppy as you call it. There is no "interpolation" that I see, you simply drop a frame. This effect can easily be seen by the following:
1) Put your original Alec200 original.mp4 in track 1
2) Put your Alec200 speed increase 1.2.mp in track 2 and set opacity to like 50% or so
3) set the scrubber to 00:00:06:00
4) now move the track 2 video so it's clip time is at 00:00:05:00 to line up with the 00:00:06:00 of original clip. These frames will exactly overlay as 6/1.2=5
5) now start frame advancing one frame at a time (period "." key works good for that)
What you will see is the original car and the opaque car exactly overlay at this aligned timepoint, and also for the first 4 frame advances, on the fifth frame (00:00:06:05) you will see some blur for the dropped frame to get your speedup. So now the two cars are no longer aligned but slightly offset. This exact offset between the opaque car and the real car will stay until the 10th frame (00:00:06:10) when another offset (skipped frame) will occur. There is no blending as you desire, one simply has a dropped frame during speedup which can cause the playback chop you observe, especially when the source is only 25fps.
Jeff