Restoration and upgrading old bike
If you really want to use that bike, the best thing to do is fit the cheapest components that will make it go (and stop), clean off the worst of the rust and use car touch-up paint to cover the bare spots. You might want more than the cheapest of the cheap for brake pads, especially if the rims are chromed steel and you're not in a desert.  Unfortunately before you can really test anything you'll need tubes and tyres.

Then you've got an ugly bike that's good for not getting stolen, and won't lose value because it hasn't got any (not even all the value of the components you fitted new).  That also makes it good for leaving out in all weathers, though  it won't last forever. If you've got spares from another bike, it's much more worthwhile. I ride an early 90s bike only a little better than this for a few miles a day, and lock it in not the best places, so I assume it will get stolen/vandalised.  Despite having spare new tyres to fit, I spent almost as much on essential components as you could spend on the cheapest bike in a cheap bike shop, and what I ended up with was only a little better (mostly tougher).  When you've run it into the ground, save the components you fitted for use on the next bike, and recycle the rest. 

If you've got major rust, espcially on anything critical, walk away.

One of the worst money pits on a bike is trying to change the wheel size, with only a few exceptions.

This may sound harsh but it's the only way to avoid throwing good money after bad.