i think that 500 hp is way to much compared for stock 170
ud need to change every single think on your car,in order to make it reliable,safe or even drivable
engine swap is not a bad idea considering that bmw engines are allready preaty tuned,and are not easy to work with,especialy if u dont have much knolage about engines... i recommend to go for turbo models,smt like 3.0 turbo from 335 i orm smt like that
2.8 non turbo models are also good choise,they are not as tuned as other models,it is smt like detuned version of 2.5 coupe models... bouth have 193 hp...and they go as hell,ive driven 328 i e 46 and it goes like hell!!
D much much faster than 320
its also straight 6 as your and it would fit without major problems...same way for 3.0 turbo model... just pay atention that u have to do other changes(especialy if u go for more powerful ones like the 3.0 model) like clutch,potencialy gearbox breakes suspension e.t.c ... also u can consider adding turbo to your engine...its usualy very compicated,couse u have to do a lot of changes on the engine for reliability,but bmw has very `tough`straight six engines made for sporty driving so it can take lot more pressure than normal engine... my friend added turbo to his 1993 520 i without ANY changes on the engine drove it for a pretty long time,without any problems...and it was damn fast!
maybe consider changeing comprasion ratio,and i think that would do the job (but i do not guarantee maybe my friends case was just a coinsidence and it CANOT be done on every car ) let us know what did u decide to do with your car
) good luck... hope this helps