Late 2009 iMac Stuck in Password Mode, Won't Accept Install Disc

Recently bought a late 2009 21.5" desktop from a surplus auction to use as a backup to my MacBook Pro. Before I bought it, I made sure it powered on, which it did. When booting up, it presented a password screen from the previous owner. Since I didn't have the password, I bought the correct install disc for that model and tried to do a fresh install.

Unfortunately, though the iMac accepts the disc into the optical drive slot, and you can hear it whirring at start up, I'm still stuck with the old password prompt screen. I've tried holding down Option at start up, holding down C at start up, reseting the PRAM. Nothing. All I get is that dang password prompt screen. Can't get into Start-Up Manager or anything else on the computer.

I'm not too excited about going to the local Genius Bar. Last time I went there, with a 2011 iMac that wouldn't start, they held the computer for 2 weeks, then told me they couldn't figure out what was wrong and suggested I recycle it. The computer was only 14 mos. old. Should have bought Apple Care, but I figured if you're paying $1200 for a machine it should work longer than that. But that's another story.

Hoping someone here might have an idea what's going wrong. Bad optical drive, maybe? I'm pretty confident I could change that out on my own, if need be. Any help would be appreciated. Thanks!