When I said later model engine I was referring to a 250 or 292 and they are later model than your 235 they are still 30+ years old. There is a thread talking about 4.2 inlines which are real late model engine, check that thread about that option.
You can use either transmission, its up to what you would like.
Maybe you should give us more information what your looking to do besides drive daily at highway speeds. Are you going to do this job in your garage at home or hire it out? How long do you want your truck out of commission to do this project?
Don