Its hard to explain, Yes you can have good compression with bad rings with a heavy oil consumption problem, the excess oil is giving the compression rings a better seal to the cylinder walls. There are three rings on a piston. The top is the main compression ring, the second one down from the top is the secondary compression ring and the third down is called the oil scraper ring. The problem is with two things, the compression rings on a diesel are very stiff and that is why they have cast iron liners for the cylinders. The problem is that over time, and especially from lack of regular oil changes, the cyilnder wears out (Gets bigger in diameter) and the oil rings are very light tension and they can only spring outwards a little bit. When the cylinder get too big they loose tension with the cylinder walls and allow excess oil to get into the compression rings and eventually into the combustion area and is burnt.

You have a good running engine by the sounds of it, good compression, so you can probably get by with new liners, pistons and rings. Maybe you can even reuse the old pistons, depends on what they look like.

Roughly a grand as a worst case scenario, without replacing any main bearings on the crank. You have to replace just about every gasket in the engine, might as well replace the front and rear crank seals. You can get everything you need from Fastlane or Performance Products. A machine shop will have to install the liners and bore them to the size of the pistons.

As far as the trans goes, probably better to find a used one, I have never personaly rebuilt a MB standard trans, there isn't much to them, but finding the parts is the problem. I'm sure you could get them at the dealer, but will pay the 'star' price for them!!

Its tough convincing the wives!!! My has a lot of doubt too, of course this car never had a lick of maintence done to it until I got it around 175,000. Still had the original rear diff fluid!! They are good cars, they do require a lot of upkeep....