If you were thinking of upgrading to the Radeon HD 7850, that's a great move - it's a great GPU for the price. Have you also looked at the Radeon HD 7770? You might want to take a look before you dive in. Not only the HD 7770, but the GeForce GTX 650 Ti Boost, too.
As for the CPU bottleneck, your Core i3 processor should be fine. You've got 8GB of RAM sitting there, too. I would say that your current Cooler Master 500W PSU is enough, as these mid-range GPUs do not consume that much power. I think you'll be fine, don't worry about upgrading your PSU just yet.
Of course, an i5 or i7 processor would help - but you should be okay for now. I would pencil in a CPU upgrade for the future, though.