First, you have my sympathy.
A blinking Check Engine light is a signal to immediately stop driving and have the car flatbeded to a repair shop for diagnosis. So are unusual sounds that seem to be internal to the engine. One more revolution of that engine can be the difference between repairable and junk.
If you are lucky, it is something relatively inexpensive like a broken water pump. But, if it seems it is something internal to the engine itself, you are now faced with the question of do you junk the car now before it costs you more money, invest more in a disassembly to determine the cause of the problem, or do you immediately move to one of the options below.
Now, for the bad $$$ news.
You have several options if the problem is a real internal engine failure.
1. Rebuild your engine yourself for about $4k in parts from Porsche. I know of one person who did this and posted videos of the process on the web. He had never rebuilt an engine before but was an engineer. It took him a few months, he had to make his own special tools and went through lots of learning but a year later it is running fine. How rare that is can be judged by the fact that I've never heard of anyone else doing it.
2. Replace the engine with a used engine from a wrecking yard. There is a list of long time Porsche wrecking yards on this web site here. The downsides of this approach are risk that the engine you get will be bad (despite the good intentions of the wrecking yards, few come with any meaningful warranty) and the engine will still have the same design as the engine your originally had. Some of the wrecking yards require an engine in return (core). So when you get a price, be sure you understand what else you are paying for...shipping one or two ways, crating, rental of a fork lift to remove the crate from the truck, core return required, core deposit, exchange, warranty, etc.
3. Have someone rebuild your engine with OEM parts repairing:
a. just the pieces that are broken.
b. some more of the pieces that are known weak points
c. the entire engine with all new replaceable parts
The problem here is finding someone who really understands the inside of the Boxster engine and has a track record of successful rebuilds and who backs their work with a warranty. Once you do that, then the question you have to answer is where you start and stop in choosing what to replace beyond the obvious broken parts. Don't ignore the possibility of shipping your car to someone with a good reputation versus having someone local who does few rebuilds do the work. Would you want to be operated on for a heart problem by a new surgeon or one doing their thousandth operation?
And the question that always arises is how much of the potentially dozens of parts that can break do you replace with new parts?
4. Have someone rebuild your engine with what are claimed to be improved parts
a. just the pieces that are broken.
b. some more of the pieces that are known weak points
c. the entire engine with all new replaceable parts.
Now, in addition to the items in number 4, you have to figure out what parts that are "improved" are really improvements on the originals. How many have been installed? For how long? With what success? How are they warrantied? See option 10 for a variation on this possibility.
5. Replace the engine with a new/remanufactured engine from Porsche. ~$12k in parts. Requires a return of your engine (the core exchange). Has a 2 year warranty if replaced by a dealer with like size for like size. Has the original design with many of its potential weaknesses. Would have the third generation IMS bearing. Some engines like the 2.5 are no longer available from Porsche.
6. Replace the engine with a larger engine. The 3.4 litre engine from a wrecked 996 Porsche is a common replacement. The easiest swap is one where the DME is the same as one you are replacing as the intake and throttle controls will match up more easily. Have a mechanic do this that knows how and has done engine size swaps before. They will sometimes have to flash the DME (alter the programmed parameters within the computer that controls the engine).
7. Have your engine rebuilt but with a larger displacement. 2.5 up to 2.9, 3.2 up to 4.0. Definitely the most expensive option. But one that gives you something different than what you had. Done with many parts not used by Porsche and designed to avoid common M96 engine problems. Flat6Innovations is a source. They are located just north of Atlanta, GA and can arrange shipping for you. And if the problem was the IMS bearing, they can produce an enhanced engine that doesn't use a ball bearing on the chain end any more eliminating that potential problem.
8. Part the car out, sell the working pieces. Or sell it to a junk yard specializing in Porsches. eBay and my list of "auto parts recyclers" are resources. Or sell it to someone who likes to rebuild Boxsters. Advertise on the online forums.
9. Buy a wreck and swap the engine, selling the parts of the wreck to help pay for the cost of the wreck.
10. Contact RND (now LN). They can provide your mechanic a replacement engine rebuilt with many improved parts. It isn't cheap, but probably the quickest way to get an improved engine. Be aware of the way the core charge is handled.
Be sure and do an internet-search on the person or company you select as there are people who seem legitimate but who have had repeated problems reported by people who used their services. Just as you want the best doctor, you want the best engine mechanic and one who will stand behind his work.
11. Drop in a 400HP V8 Chevrolet engine weighing the same as your flat-6. http://www.renegadehybrids.com/
Assuming you stay with the Porsche flat-6, a place to start looking is the LN web site where the companies they have a relationship with are listed.
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So how do you evaluate one approach versus another? Is the cheaper approach as good as the more expensive? The below thoughts are my own musings, I don't pretend to know what you can afford, what your mechanical skill are, or what will your feelings be if your selected approach doesn't work out. I write this to bring up the questions that could arise, not because I have all the answers.
Ok, you have the engine out of the car because it has blown and you are thinking you will locate a thought-to-be-good replacement engine. You think it will be easy if you buy the same sized motor all wired up for the engine controller DME that is already in your car. Are you thinking of doing this swap yourself or maybe have your local P-car mechanic do it? Have either of you ever done it before?
How much verification that the engine is running correctly do you want to do? Since many replacements or fixes are much easier/cheaper to do with the engine out of the car, what parts do you replace before you install that used engine? Did you get a compression or leak-down test readout with the engine? Do you know how the engine was running when it was removed from the wreck (not what the seller told you but did you see it yourself or have someone you trusted watch and listen)? Or how long it was stored and in what conditions (covered, shrink-wrapped, climate-controlled, etc)? What kind of warranty is the seller going to give you? How long have they been in business and what is their reputation?
Once you have the engine off the truck, you are faced with the age old question of how much preventative maintenance is the right amount and how much is too much. How many “improvements” do you want to do?
Where do you use OEM parts and where do you use third party "improved" parts?
(the parts known to be available from a third party manufacturer are underlined)
Clutch?
Pressure plate?
Transmission fluids?
AOS/J-tube?
Water/Oil Heat exchanger? (The S has a bigger one than a base engine)
Water Pump? Thermostat? Gasket? Pulleys? Belt? Hoses? Clamps?
Cam cover gaskets?
Plugs? Plug wires? Coil packs? Spark Plug Tubes? O-Rings?
IMS?
RMS?
Chain Tensioners?
Drain Plug?
Deep Sump Kit?
Motor Mounts?
Transmission mounts?
Fuel-injector O-rings?
Temperature sensor?
Oil pressure sensor?
MAF?
Oil pump and oil pump hexagonal stem?
Headers?
Under-body plastic parts including scoops?
A/C “Freon”?
Oil? Oil filter? Oil filter mount?
Anti-Freeze?
C/V Joint Boots?
The list contains a partial list of the parts a potential rebuilder and installer might use so it could form the basis of a discussion of the expected work if you are having someone else do the rebuild. And a list that might give an insight into the potential differences between that motor out of a wreck, the rebuilt one from the Porsche factory or one from a reputable rebuilder..
You could add valve regrinding, valve springs, replacing main bearings, rods, pistons, cylinder liners, polishing intake and exhaust ports, headers, throttle body cleaning before you’d have a totally rebuilt engine.
The rebuilt or from-the-dealer motor may turn out to be not so much more expensive in the long run because it has more new and/or improved parts. Or you may choose to forgo many of the possible new parts on the theory that your car isn't new and so the expense isn't needed. As with many things in life, eliminating some element of risk costs money.
And these considerations are still valid if you are installing a larger displacement engine (which brings in the added issue of DME, intake size, motor mounting height, etc.).
Consider how many times the person you are talking to has done what you are asking him to do.
The laborer is worthy of his hire, you pay for experience, its more probable the person with the reputation for doing it right will treat your car right too.
Good luck.