PNG and JPEG do work, they are just converted to uncompressed DDS internally. Many of the Kunos cars use PNG for small textures where this makes not much of a difference (they have that kn5 size limit they have to keep under for some reason. Using PNG helps), but if you use 4096x4096 PNGs the resulting filesize in your VRAM will be enormous. The Bentley GT3 mod had that problem, ~15 PNGs of that size, some just single colour, I think I calculated that it would use around 700MB of VRAM alone once on track in AC.