I have this exact same model and it's still going strong!
Actually, the first thing to go was the hard drive; it died about one week after my one year warranty was up. But after that, everything is still running to this day and I still use the machine as a spare for guests like yourself. I added an extra hard drive, an extra DVD burner, and it all ran off the original power supply. I eventually upgraded the video card to an NVIDIA 6600GT (and then later, a 6800GS), and that was when I had to upgrade the power supply.
I agree with dobbles; if you haven't upgraded anything else on the machine like the video card, you can probably get a 300-400W powersupply for 30-40 bucks, maybe even less if you look online. These models initially shipped with a 250W power supply so if the components haven't changed since you bought it, anything more than 300 or 400W would probably be overkill anyways.
$50 for 2GB of PC3200 RAM is a steal; I remember when I bought this machine 5-6 years ago and put 2GB in (4 sticks of 512MB) it cost me over $200 (didn't buy it from Dell, if I did, it would have cost $400 or something stupid if I recall). Heck, I'm not even sure you can get it for that cheap anymore since it's rather old and manufacturers have stopped making it.
The hard drive price is reasonable.
I'm not sure what you mean by the heatsink is dying though. On my model, the heatsink is this massive hunk of metal that attaches to the CPU and lives under a green duct that connects to the back case fan and it's the back case fan that pulls the air out and shunts it to the back of the case. Compare with a normal CPU heatsink and fan combo where the fan is mounted directly on top of the heat sink. I rather like this design as it's very quiet. Dust tends to build up on the heat sink though, so sometimes I have to remove the green duct and take some compressed air and dust it. But there is no way for this heat sink to die since it's just a hunk of metal. The back case fan could die, and that's easily replaceable for less than $10, but the original is still going strong.
If you can do this for under $200, I'd say just upgrade. The system is still pretty good (it wouldn't be running Vista, and to be honest, you probably wouldn't want to anyways) and since the RAM is cheap and available, I agree with dobbles that now would be the time to do it if you plan on using it some more in the future because finding more DDR RAM might be difficult in the future. That plus you wouldn't have to waste time setting up another machine; you could just continue using it once you transfer your data from the old drive to the new drive. If it'll cost $300-400 or more to do the repair work, then it becomes harder. You can find new machines for $400-500 or more if you wait for sales from Dell or the big box stores.
Edit: To answer the rest of your questions, you'll need at least a 250W ATX power supply to power it assuming nothing else has changed in terms of hardware, although any of the power supplies you can buy today should be sufficient in terms of watts and connectors.
PC3200 DDR RAM will work in the machine, and yes, it'll clock down (I'm using this type of RAM myself). Actually, PC3200 RAM is ideal for this configuration because it'll run at a 1:1 ratio with the CPU. Just make sure it's DDR RAM and not DDR2 or DDR3; those newer sticks won't work with this machine.