I would definitely put the photos on the external drive. There's virtually no benefit to putting them on the C: drive, and they do take up a lot of space.
The entire process of moving to another computer is described in detail here: http://www.lightroomqueen.com/how-move-lightroom-to-new-computer/
Really? I was planning to use the external drive as part of my backup plan and the external drive only spins at 5400 as opposed to the C: drive which spins at 7200. I will check out that link. Thanks.
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I am with dj_paige. The photos are best left on an EHD. For a backup, use the cloud or get a 2nd EHD. You really don't want to use up that much space with photos. Lightroom is perfectly happy accessing photos on the EHD; you will not see a slowdown in Lightroom due to rpm.