When i first read your post (in my slightly gormless, just woken up state) i thought "Yeah, that'll work!"
Difficult one to call, with the age of the car it's often easier to just replace the M/Cyl with another known good secondhand unit. Rebuilds aren't always as successful as we'd like to think.
That said, many have been rebuilt over the years very successfully. I think you'll have to do it on a "suck it and see" basis, get a rebuild kit, strip and clean the M/C and evaluate it. If it's all good, polish the bores and then fit the seals and give it a whirl on the car.
If it turns out to be horribly corroded then obviously you'll have to go for a new or reconditioned unit.
Some light corrosion of the bore can be polished out using this stuff :
http://www.halfords.com/motoring/pai...bbing-compound
If you can get a long bolt, piece of stud bar or similar in the drill and wrap a lint-free polishing/cleaning cloth round it (microfibre cloths are good) and smear some of this on it, stick it down the M/C and turn the drill on it should clean, smooth and then polish the bore to a highly smooth surface.
It's what's known as a "diminishing abrasive" so starts off relatively coarse and gets smoother the more it's worked. I've used it in suspension hub knuckles to polish the bearing housing prior to fitting the new bearing.
From this :
to this :
It removed all the score marks from removing the old bearing, cleaned up the surface and then polished the surface to almost a mirror shine in about 30 seconds.
Use some meths, brake or carb cleaner or similar to clean it through after to make sure the compound is completely removed. Use some fresh brake fluid to lube the seals as you fit them to the M/C piston and a little more to help them slide into the M/C when it's ready to be refitted.
It's possible it won't get rid of the longer brake pedal travel, that might still be down to the pushrod adjustment between the pedal and M/C but at least you'll know the M/C is sound after. It should get rid of the squelching sound and that "sinking feeling" though.
