Re: your PSU...depends. How old is *old* exactly? Are we talking "most of the power is going to the 3.3v and 5v rails" old or "most of the power is going to the 12v but its been used heavily" old? Of course you are running a late model Pentium 4 right now and pretty much anything Core 2 or later will be less taxing on your PSU than that thing. Still, you have to look into what a modern video card will draw out from it.
Personally I would look into a decent (and well reviewed) +450W PSU before I go buying multiple-hundreds-of-dollars worth of electronics components. Or in fact any other upgrades, at any price for that matter.
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BTW as far as this upgrade thing, it really depends on your budget. An i5 3450 is going to set you back at least $125 used...more like $150 to $200 though. On NewEgg right now the 3450 is ~$200 NIB.
http://www.newegg.com/Product/Product.aspx?Item=N82E16819116506
Add on a Socket 1155 motherboard and that's at least an extra $50. For example (the cheapest I could find NIB on NewEgg that was Socket 1155, no comments on quality but it is generally positively reviewed) the ASRock H61M-DGS...
http://www.newegg.com/Product/Product.aspx?Item=N82E16813157315
...and that one doesn't have IDE. So you are out a HDD and your DVD drive.
The 40GB drive isn't the worst loss in the world to be honest (heck it's barely suitable for a long-term Windows XP install), but since you need a DVD drive to install your OS of choice (presumably Windows 7) that's at least another $20. Unless you want a motherboard with IDE; the cheapest ones are ~$100 on NewEgg and have mixed reviews. The only one that doesn't and has generally positive feedback (the ASRock Z68 PROFESSIONAL GEN3) is over $260. Therefore, unless you are really attached to that DVD drive, it would be cheaper to get a new SATA optical drive.
So...200+50+20, so $270 so far, and thats without a new SATA D: drive, which would add around another $60-75 on to the tab (if not more for truly substantial storage). Plus about $40-75 for a new PSU (which is really the most critical purchase I feel you can make at the moment TBH).
So we are up to $385 (CPU + MB + new HDD + SATA DVD + PSU). And thats before we even get to the video card. And Windows. You can expect to pay $200-250 for Windows 7 Pro retail, although there are other routes out there for "7" that are cheaper than that...either a really good deal on retail or an OEM version. I would strongly recommend a retail copy, It's a bit expensive though so I recommend shopping around for a deal from someone who is a reputable vendor.
Video card is a bit more subjective. Personally I use NVIDIA cards as I do video work, and Adobe Premiere likes (at least up until recently, haven't checked if AMD's compute changes have changed Adobe's support) NVIDIA hardware. So I can only speak for those particular brand of cards, but there are some fine AMD products out there as well. I will leave that research up to you but I would expect to pay at least $175 for anything modern and gaming-friendly, and more like $250+ for real performance.
Oh, I forgot RAM. +$40. Ish.
So if you want an overhaul, expect to pay $700-900 for all NIB stuff; without really shopping around and avoiding used (gently or not). So is that something that you can comfortably budget for?
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(ADDENDUM) Alternatively, a Core 2 Q9550 is about $50-100 used on eBay, and a Q9650 is $75-150. I have a QX9650 in one of my machines; inferior thermals to the Q9650 generally but it's performance is acceptable for my needs with that particular machine (standard def video editing and gaming at 1440x900 with a GTX 570). Also for consumer-grade Core 2 CPUs I would not bother with anything besides a "Wolfdale" or "Yorkfield" processor in this day in age, with a preference to the Yorkfield line unless thermals or energy consumption are a concern.
Of course if I where to go for a more-modest upgrade path like this, I would (again) upgrade the PSU before buying ANY new parts. And also check the motherboard for bad capacitors. If they are starting to go I would not bother with maintaining that build (who wants to improve a motherboard that's nearing death?), and instead slowly work up on the aforementioned upgrade route.
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(VERY LAST THOUGHT) Finally, I also noticed that your MB uses PCI-e x16 v1; not useless by any means but you will not be able to get the full bandwidth of quite a few modern video cards with that expansion slot. A GTX 280 or a GTX 560TI (or really any card similar in specification to those two) wouldn't be jammed up too bad but really high-octane release (as of the time of posting) like the GTX 660TI (or better) or the latter grades of the HD7000 series will be less tolerant to the potential bottleneck; certainly cards that could really do with a v2 slot or better.
LordHaHa