I would suspect this engine can be rebuilt for less than $4k.
The biggest expense in auto ownership is not maintenance and repair, but rather depreciation.
The value of a well cared for 420 SEL, even with your mileage, has to be around $7k-$8k, so I can't imagine it wouldn't be worth it.
There is a very well regarded Mercedes mechanic in Southern California that many participants on this site take their cars to, including myself. His shop is in Tarzana, off of Encino Blvd. at the 101 freeway. He may or may not be close to you, but I live in Diamond Bar and drive 51 miles each way. I personally know of guys driving down from areas as far as Big Bear, Bakersfield, etc. to have their car serviced by Enrique. There is even a guy with a 600SEL who has his car trucked down from Montana!
He is in his middle to late fifties, and has worked for Mercedes dealers since he was 18 years old in Spain (his birthplace), South America, South Africa, and at two dealerships here in So. Cal. (Beverly Hills and Thousand Oaks) before opening up his own shop about 10 years ago. His knowledge and skill great is so great, that I'd place him as one of the top Mercedes technicians in North America. He's that good. And his labor rate is ridiculously cheap @ $60 / hour, which is the same rate that the knuckleheads at Pep Boys charge.
I'd have him take a look at the car, and if he can fix it for the right price, then see if he or another Mercedes shop owner would buy it from you.
If you do a search on Mr. MB Motors, or Enrique, you will find many posts that reference him. Here is one post:
Just my $.02.... (and another $0.98 would buy you a cup of coffee).