That sounds well within reason. It's the custom machining and custom parts that can drive the price through the roof. It appears you intend to use as many of the original parts as practical (no new carbs, etc). On that front, if 35HP (for takeoff) is the goal, do you think you'll need to go to the trouble to modify the stock cam grind? Or, even do much work on the induction ports? If you clean things up just a little (e.g. those screws you identified on the carb butterflies, the edges in the carb, etc,) that seems like it might be all that is needed. I know you've built the flow bench, etc.A well thought-out conversion of a 49-series engine producing 35hp at 3,600rpm should be possible under USD2,500 complete.
Back to the PTO shaft: If a tapered one is deemed best (considering cost, likely performance, risk, etc), then the two options are to buy that crankshaft and put it in,or buy the engine with the tapered shaft already in it (the gaseous fuel engine--for propane or natural gas). That engine has chrome exhaust valves, but I haven't been able to determine if it comes with the standard Nikki carb. I assume that right now your plan is to use the straight 1 1/8" PTO model that you have already.