Take the cam cover off and see what's going on with that cam chain. It's not unusual on the early M42 for the idler pulley to snap off, or for the chain guides to wear out, or for the tensioner to fail. All can cause the chain to skip a few teeth. I'd guess that your chain jumped, but that's an odd place for damage. Maybe a cracked chain guide mount let the chain chew through the case? Typically that happens on the passenger side of the motor though.
I'm hoping that you don't have 16 bent valves, but from that I'd say it's unlikely. However, used M42s are cheap. BMW made a lot of them - and the 318i was always seen as a budget car...so good ones are still pretty cheap. You also don't have to have an e30 motor. The later e36 versions will fit if you swap some belts, manifolds, etc. I'd bet the post-95 M44 would fit as well, given some fairly major electrical work.
Swapping a head can easily be done outside with a few basic tools. I've done it myself several times. The M42 short block is truly rugged - they're almost always OK even if the head has totally self-destructed.
If you're staying stock, there's a guy selling much of what you need down in Zionsville, Indiana...
here's a link. He's less than 5 hours from you and it's an incredible deal. $500 gets you a huge chunk of parts including a good motor, lift & engine stand, trim and other stuff (I'd consider going halfsies if you don't need all of it). I wish it wasn't so late in the season - I could pick it up in my van, visit family in Chicago & likely drop off whatever you need!
Another cheap, easy swap that's been documented all over the place is an M50 or M52. The S5x is expensive, but correspondingly more powerful. Find yourself an e38 530i 5-series. They have the correct oil pan to fit the e30 chassis, they have a lightweight alu block and stock they run an easy 200 hp stock IIRC. But if I had the expertise, I'd be looking to swap one of the new BMW turbo four cylinders (like the N20 in the 335i/Z4/528i/328i/X3. Seems like an incredible motor, but that's a lot of work to swap. Who knows what sort of fun the electrical interfaces would be.
If you want sheer power the best bang-for-the-buck is hands-down a smallblock like the LS1 or some variant thereof. The BMW M30 is another cheap alternative. My '82 6-series was nowhere near as lithe as my e30 - but what a tremendously sweet motor!