Pieces of steel in cylinder??

Even at .040 I don't think it's junk if it needs boring. Hensley Motorsports builds 318s all the time boring to 4" and beyond. All Sonic tested of course and machined to the nth degree. They've been doing that better than 25 years. You've already mentioned the shop saying the cylinders looked good. Is the jury still out there? If it will run at .040, I'd run it. If it needs boring, I recommend sonic checking it.