This has my vote You dont want someone easily recovering any of your old data...even if you format it a few times they can recover data from it if they are evil.
Also what are you asking exactly? You want to re-install XP fresh on this machine with the cd-key assigned to this PC? or are you trying to use this CD-Key on multiple machines? If you are selling the PC with a copy of Windows XP on it you must also give them the COA with the CD-KEY for it to be legal. Not so much the media, but the COA for sure.