When I had a 115 240D I thought about getting a set up like that. if i recall correctly the air filter was an oil style air filter. I remember it being a pain in the a$$. I don't think I changed... I sold the car shortly after to get the Ponton in my sig.
I really miss that car. I would get the stock setup working correctly.
If it is an oil type filter maybe change it out for a CA spec 85 300D-T filter. its a paper filter that sits on the fender just like the stock 240D setup.
I don't remember exactly what the stock set up looks like as its been years.
Post some pics
as far as performance goes. I got a sick pleasure out of holding up traffic. I think the 240Ds are special in their own ways. If you want performance, get a 123 300D or if you really want performance you have to sell your soul and buy a gas powered car