Not to minimize this issue in any way but I do believe you are more upset than you need to be about the rust issue in the block. All your mechanic has to do is thoroughly flush it and you should be good. You are not going to get every little piece out and to be honest you do not really need to; you need to flush it until it runs clear, then reassemble everything, fill it with some anti freeze and assuming the rest of the cooling system is adequate be good to go.
If on the off chance that your block is completely clogged with sediment, then it would need to be pulled, the freeze plugs knocked out and the sediment manually knocked loose and flushed, but I have to be honest and say that I seriously doubt you are in this situation. I have picked up cars that have sat out in a field for 20+ years that I flushed and was good.
If you go the 392 route, its going to bring another level of pain to you because you have to make it fit, then install all the wiring (computer, harness, etc). If your mechanic cannot do a rebuild correctly he damn sure is going to have issues here. If a new engine is something you want to pursue, well I would recommend you contact Indy or Hughes and get one of their crate motors; then your mechanic just has to hook it up. You could then sell off the engine you already have to recoup some of the money.