If the car is that cheap, (except for the motor) and is in great condition, I would go for it. The car is $2750 US and a whole motor is just $4200 US. Your maximum investment would be $7000 US ($10,000 CAN). This would be an average price (as Larry pointed out) for an above average car in the states.
Unless the motor is junk, I doubt very seriously you will need to replace it. Have the car checked out by an MB mechanic for the real assessment of damages before you buy, just to make sure nothing more than the head is not damaged.
Just my $.02....
76 240D (W115) - 550K miles
78 300D (W123) - 200K+ miles