This is a bit off-topic, but I was originally intending to go this route and changed my mind due to visual quality. There are 2 problems implicit in this (which may or may not be things you care about) ...
1) Even with Quality set to 70%, there are image quality issues compared to direct disc playback. Given this is on a fairly good 1080P TV, but there are color and compression artifacts even with large quality settings.
2) The Apple TV does a less impressive job upscaling the 480 DVD video to 720P and the TV further upscaling to 1808P, than my Pioneer 51FD Blu-ray player does upscaling the 480 DVD to 1080P. And I have a TV with above average upscaling.
I decided to continue to play the physical media in the Pioneer. After spending all of this money on HD, I have a hard time going backwards on picture quality. The convenience of the ATV approach is undeniable, though.
YMMV, etc. If you have a good upscaling DVD or Blu-ray player, try this first before transcoding everything to MPEG4.