86 did not have the 4.0 option But swapping a 4.0 in would probably be a no brainer, But i'll be honest i havent heard anything about 86 to 87 firewall differences. If you are going to go through the trouble of swapping to a 4.0 i would opt for an HO. The current motor you have is a decent little motor, with legendary reliablity and longevity, the only down side is that it has about all the power of a pencil sharpener. Transmission is probably an ax-5 or ax-4, not as good as the ax-15 but not as bad as . . . the puegot
which is a 5 speed. Transfer case is a good one two, its whats in mine. I have heard the 231 is slightly more durable than the 242, but i think either is perfectly fine.
not sure about the custom badges
Love to see some pictures.