If it still shoots, it is not destroyed. But it is probably not worth the expense of restoring, either. I'd say leave the configuration alone, but give it a good soak in a penetrating oil like CorrosionX or Kroil (expensive but worth it), and go over the surface with some 0000 steel wool to clean off the rust and gunk I see. If you take it all the way down to bare metal, it won't hurt it in the future if you keep it oiled. You should clean the interior, too, but if you are not comfortable opening up the gun, just drizzle some penetrating oil into the action and let it soak for a day or two, then blow it out with compressed air and repeat a couple of times.
My feeling is that this is the gun your grandfather wanted, or he would not have modified it. Thus it is a family heirloom in this configuration. If you like this gun as a type, why not buy a similar but unmodified gun as a shooter? That would cost less than getting this one a new barrel, getting the trigger guard welded up, and refinishing the package.
That's a .45, I take it? I think a 1917 in .45 ACP would be easier to find than a 1909 in .45 Colt, but regional distribution is a peculiar thing. You might find a 1909 in your vicinity before you come across a 1917.
Two cents. Value as appropriate.
