I recently came to the same decision with my 1993 300E2.8 - repair or trade-in? I decided to keep the car, and I opted to have the dealership replace the head gasket, timing chain (+ tensioner, rails and guides) and belt and belt tensioner. Current estimate is $3400, plus I got a '05 C240 to drive around in for the 4 days they have my car (woo!). Other repairs that the dealer wanted to charge the earth for, I did myself (engine and spark plug wiring harnesses).

My comments will echo G-Benz's, but at 200K+ I'd also have the timing chain replaced, and while the head is off, get the valve seals and stems done.

While I was there, I saw another post-1990 W124 up on a lift. The owner had taken the car to a local independent to have head gasket and timing chain done also, but had forgotten to replace one of the pins in the chain, causing the chain to skip a tooth - make sure whoever does the work is very reputable, or take it to the dealer.