Am I Being Unreasonable? Original Owner Wants Car Back

Saving up the money to buy it or it's trade should be the route he takes. It sounds like you are willing to sell it or trade it on your terms so he has the green light to start working toward that goal.
If this guy doesn't have the earnings power, financial sense, or otherwise can't save up enough money to buy the car or buy you a replacement then he doesn't deserve his Dad's old car. I look back at a couple of engine builds I have commissioned ($17k and $20k builds). I never thought I would be able to do something like that but where there is a will there is a way. I did it by eating ramen noodles and bologna sandwiches (figuratively). If he doesn't have that kind of commitment then he can just keep dreaming.
It would be nice to see a guy get his Dad's old car back but that is just emotional feelings. What is logical?