To rebuild or not, used aq260a

I just brought a used GM block Volvo eng out of a marine parts boat yard. The eng was ran for me a few mins without the Impeller in. It was a '84-86 eng with the volvo bell housing cover. It sat on a pallet for 6mos until last week. I just started to clean it up to get it ready to install it into my '86 Bayliner 2560 Trophy. I started with the exhaust man's...Wow! alot of rust flakes! Alarmed, I took off the thermostat housing, No thermostat! and the inside of the housing looked like a rust bucket. I paid $700. for this eng and altho it runs nice and Idles, no misses, what do I do??? Is this cosmetic's Im dealing with? Do I take the eng apart and put new valve cover & oil pan gaskets, thermostat housing and whatever looks rusty? I want to also put on a FWC kit. This eng only accepts the 'block only' FWC type. Im a novice do-it-your selfer and have done most of my repairs but I need some advice on this.

Some say once an engine is raw water cooled, you should never convert it to closed, because the heat exchanger will continually clog with rust flakes and sand coming out of the block.
I have no experience personally, just what I've read.

As far as general condition and whether rebuild necessary, test compression and oil pressure at cranking speed.
If concerned about the manifolds, clean them, or get new ones.

If this engine was previously raw water cooled via salt water, I'd really think twice about installing a Closed Cooling system on it.
Unless you were to do an extensive chemical flush, of some sort, you may have issues with regard to rust scale within the E/G (ethylene glycol) side of the tube bundle...... of which is the side that is non-accessible to the "average Joe".

The issues genarally occur within the outer area of the tube bundle, eventually diminishing it's abililty to remove heat.

You could give it a try, and then remove the H/E (at let's say an interval of 10 hours), and do a flush, turning it upside down over a clean container, as to remove and catch any rust scale.
I'd then repeat this at another 10 hours or so!

Once you make it past 40-50 hours, you may be OK....... then maybe check again at 100 hours!

There's certainly no harm in trying it, as long as you carefully watch your engine temp.