Oh my goodness, whatever is going on here?
I've got many neighbors who've got Dock Queens and Cocktail Cruisers that I wouldn't be useful for my style of coastal and intracoastal cruising. But, you know what? They are having tons of fun with those boats and enjoying their time on the water, even if the scenery is always familiar.
I've seen boat engines repaired (not rebuilt) after water ingestion. I don't know that I've seen leak down test results, compression test results, or dyno test results or know what the damage was. And don't know that any of them ever got enough hours on them during my observation window to know what it did to their lifetime. But, I do know of cases where the owners got years more life out of the engines, perhaps with a "new normal" of a little more grey or grey-blue smoke, etc. I've also known of unfortunate cases where the repair project got abandoned and the boat got a new engine or never left the slip again.
If it was me, and my engine ingested water and rusted -- out it would go. And, I write that as a person who did replace an engine on my present boat. I just would want it back to guaranteed reliable for my use as quickly as possible and wouldn't want to spend the time fixing it to risk spening more time to replace it.
But, you know what? If I didn't have the money to replace (or rebuild) the engine, or just had other uses, you know what I'd do? I'd fix it as best as I could given what I was willing and able to invest and ask myself how I could enjoy it. I wouldn't fret over what I couldn't do.
If it was a good weekend condo, I'd enjoy it as much as I could and invite friends to do the same.
If it was a good champaign cruiser, I'd enjoy more sunset cruises.
If it was okay to put-put down the ICW at a low throttle setting, I'd become a more familiar face at local anchorages and nearby marinas.
And, when I was done having fun with it? When that use got boring? I'd see if I was able and willing to invest more to fix it more, or I'd sell it to someone looking for a weekend beach condo or who loved sunsets and champaign.
The OP owns the boat now. I wish him all the luck in the world getting it running again. And, I hope he gets it going well enough to enjoy it.
I surely can't guarantee that'll happen. It doesn't always. But, sometimes it does. And, I want it to turn out that way for him.
Good luck!