904 Trans for 500 HP?

To answer your question about how to build it up my suggestions are use a good quality COMPLETE re-build kit. Shim up the clutch packs properly (approx. .040" in the rear pack and .055~.075" in the front pack), shim up the total end play to .015" or as close as possible. Upgraded clutch discs and steels are a plus IMO but some say there not needed at your level. Install either a Trans-go TF-2 shift kit or good manual valve body. Check the front servo apply lever. Some are pretty wimpy at 2.9, if so replace it with a 3.8~4.2 ratio lever. Some will say use a 5.0 lever but I haven't had good luck with them in 727's (they overlap on the 2-3 shift) so I usually shy away from them for what little gain you see. Replace the front clutch carrier single wound spring pack with a multi spring pack. Install a deep pan and good cooler. That should make it plenty strong.

Performance gains are not absolute. No way anyone can say you'll gain 2 tenths going from a 727 to a 904 and be right because every car reacts differently and you might build the 904 with a better or worse converter which affects performance a lot. It could even be more then 2 tenths (if your 727 is tired and you build the 904 with a better converter) but most likely performance will be a little less. Even if it's only 1 to 1-1/2 tenths it's that much and if fuel mileage is also a concern it could help that some also.