You paid $120 for an inspection??? I would recommend you read the Boat Inspection Trip Tips
thread I started, as it will help you determine what problems this boat has and whether it is worth getting a survey on or not. Unless the person you paid to do the inspection gave you a report, doing your own "inspection" of the boat is probably worthwhile.
Is the post stainless steel or regular steel? From your description of the metal—having large flakes of rust, I'm guessing it isn't stainless steel. I've dealt with damaged compression posts on several boats. If the post isn't stainless steel, I would highly recommend replacing it with one that is. Wire brushing the rusted areas will often let you figure out whether it is just surface corrosion or structural corrosion. However, since you don't own the boat, doing that would require the owner's permission.
While you might prolong the life of the compression post by using OSPHO or other rust inhibiting compounds and painting it, I would suggest you find out why the compression post has rusted so badly to being with. If the boat has a normally wet bilge, then you may have other issues to deal with. A wet bilge, especially if the bilge is electrically hot, could easily result in accelerated corrosion. It would probably be wise to check any metal through-hulls and seacocks, as well as the propshaft and packing box.
As for cost estimates, that will be pretty specific to the boat, and depends on whether you need to make a new compression post step, what the post is made of, whether you do the installation or hire someone else to do it and so on. You will need to take the mast down to replace it, so if you're planning on replacing the standing rigging, this might be a good time to do so.
BTW, copping an attitude isn't going to win you any friends...