If I rule out engine internals from a compression test, then would that indicate that any problem would be external to the engine, ie much more likely/cheaper fixed? I just want an easy way to see if the car is worth tinkering with (ie manageable by myself, within a budget and not requiring major work) or better to part out.

I would guess yes, it would be external items. For a 420 to have such bad power it would have to have some serious blow-by!

As for the kit you have, I cant help. I always have compression tests done by a friend. But I think his just has a rubber end he holds to the plug hole by hand and another turns the engine over. Also I am not sure if it will work for a gasser, but I dont see why not. It just reading how well the air compresses within the chamber. And a diesel is much higher compression. I would think the kit would have a large range.

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1991 560 SEL / 185k miles
1992 750il / 17k miles - project car