I have considered this modification for my own Ranger as it is a trail only machine right now, but I am still thinking...
As far as rebuilding the tranny, I would certainly pull apart any tranny that I got as a core from a salvage yard. The reason most vehicles are there is that they have some problems. Especially if they are not smashed in some way... (and most are not smashed - which means to me, people just got tired of fixing them). A rebuild kit for this tranny is not that expensive.
There are lots of performance parts availble for the C4, which is virtualy identical inside. I built one for a 69 Ford van that I ran a few years back. I added high performance clutches and bands (the 2nd gear band is especially subject to wearing/breaking), and I did a B&M full race rebuild on the tranny - and in so doing, eliminated all automatic shift functions. It became in essence, a 3 speed manual that needed no clutch. It held up pretty well in that heavy van, though I should have used a C6. I had it behind a 302 that was well into the 300+ HP range and it would sometimes pick up the front tires going into 2nd gear... It shifted HARD. (Too hard for most people's taste - but I had built a "sleeper" vehicle and drove it like a maniac.)
I now recommend Transgo instead of B&M. Their kits seem more complete and have better components for less money. I also recommend a stall converter if you really want street performance. For 4 wheeling and crawling, of course stick with a stock converter - they pull harder from idle. The stall converters are designed to slip until a certain RPM range is hit, making them engage harder all of a sudden - perfect for drag racing, but rotten on the trails.