I told her she should expect to spend at least a grand to fix it if it's fixable and she said that would be worth it.
A quick search of wrecking yards on Car-Parts shows 1FZ engines going for $1k-$2.5k. But that's what they're asking, there are a bunch up on there and I'd be willing to bet you could get one for a lot less. There are several 80's being parted out on the classifieds semi-near us, could make a weekend run to pick one up. These engines really are in very low demand as not very many of them fail, far more being parted out then need a new engine. Seems drive train is one of the last things to go from an 80 being parted out, guess that's a good sign.
Bet you could do an engine swap for less than a grand not including the cost of your time. If you have someone like Aric do it, bit more, but still not horrible.
She won't get much for a vehicle with a blown HG, even with lockers. It's worth far more parted out than whole, but parting out a vehicle is a huge pain. My guess would be you might be able to sell it for $2k-3k as is (if the HG is truly gone). No idea on the condition, etc of the vehicle, but guessing she could sell it for at least twice that if it had a good engine in it. If you listed it in a larger market (Portland) and were willing to deliver it up there, it could go for more than that.
There are still a lot of 80's being sold around the $8k-$10k range. When I made Progressive comp my truck (after initially quoting me a value of $6500) they came back with a market value of $12,500. This was less than a year ago. Granted '96 vs '93 will hurt a bit, but in the end it's still an 80.
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FWIW the axles alone are worth $3k or so. So she could easily sell the axles, pick up a set of unlocked axles (couple hundred) and easily pay for the engine swap. Locked axles don't change the resale value one dollar unless is someone on 'Mud buying it.
So that'd be my recommendation, swap axles to pay for then engine swap, then either sell or keep.