1992 mk5 escort xr3i 130hp zetec 16v

A couple of days before when I startet the engine I could here some serious valveticking. But that stopped after 10-30 secs.

The other day i was driving home and noticed that the temp dial was on the red. I stopped the car immediately and filled on some water. After this it has been using water and its coming white smoke out of the exaust on idle. A friend of mine took a look at it and he said the head-gasket was broken. He allso thought that there were many of the piston-rings that were gone.
The engine has done 256.000km. I'm wondering if it's smart too fix it or maybe get a 2.0 or an rs2000 engine and lump in?

I'm from norway, so pardon my english