First, make sure to properly shut down Windows.
Yes, this will work fine. I would suggest disconnecting the 500Gb HD for the Ubuntu installation. Then, after you install Ubuntu power off the computer. Next, connect both drives and select the Ubuntu drive (160Gb) from your boot menu or make the 160Gb drive the first in the order for Bootloader devices. Boot up Ubuntu.
Then, open a terminal and type the following command:
when you run this command (hopefully if all goes well), the Grub bootloader should detect Windows. Next time you reboot to the 160Gb drive, you will be given the option to select either Ubuntu or Windows from your Grub menu.