Just a wild ballpark would be $10-15K to repair and replace all deteriorated rubber bits, suspension, brakes, engine, and electrical. Change all fluids, If additional air suspension components need work add another 2K or more.
I'm not with Rumb 100% on this - if you go Mercedes "approved" (ie dealership) parts to take the car back to absolute perfection, you might be looking at that much, but if you use Autozone, Napa, etc for generic use hoses and such, it'll be considerably cheaper. Considerably. As an example, I couldn't find a rad hose for my Fiat for anything under $200, so I took the old one to Autozone and asked for something with the same bends. I paid $42 for a Ford piece that matched the inner and outer diameters and trimmed out the lengths I didn't need. You can do the same with your grand dad's car IF you decide to change it all out.
You mention that the wiring might have been nibbled into - if such is the case, you'll likely end up with an engine fire if you don't figure that out. If you aren't looking to dump a ton of money into a new harness, use electrical tape, or any number of liquid alternatives that you brush on and wait a few mins to dry.
As for the rear end, yes, without a doubt, a 280se or SEL rear end will fit, bolt in. You'll not have the air bags, but then again, you'll also not have the considerable expense of replacing them when they go wrong.
Something to note when doing all this - in pristine condition (Pebble Beach concourse perfection), you can expect to get $15-20k for the car. In an average situation, with some minor flaws, perhaps a bit of faded paint and normal rust spots, you might get $6k or so, usually less. The market for a 109 hasn't improved markedly in the last few years, so before you start dumping tons of $$ into it, I'd suggest getting it into running order, figure out what HAS to get replaced/fixed for safety/driveability, and leave the rest to the "fix it when it breaks" category.
I'd love to see pics if you have them ...