Whatever time you estimate it will take, double it. Seriously, we all underestimate time to complete things. Even my doubled estimates have been short of the actual time I've taken.
IF (!) you decide to take this on (my advice here is in addition to what others have said, not instead of it):
Since you're doing this as a business, I would give everyone a written quote. When I'm hiring a contractor or someone to do something around the house, I always ask in advance if they'll give an itemized written estimate. No one has ever said no, however some people don't actually give me a written estimate (even after I remind them), or they'll give me a piece of paper with a dollar amount on it that doesn't describe the work being done or something like that. I don't hire these people.
One contractor I work with gives all his customers itemized written estimates, meaning I never have to ask. Sometimes it's a range ("$1100 to $1500 depending on how much of the sub flooring has to be replaced"). The estimates describe exactly what's being done and exactly what materials are being used. He charges for the job, but obviously he's coming up with the numbers by adding the cost of materials to the cost of his labor. I would do it like that.
If they accept the quote, have them sign it (marking any choices they've made) and give one copy to them and keep one copy for yourself. I might forego the signature, but I would definitely have one copy for each party. If you email it you'll both have copies.
I would have to think about this more to come up with better wording, but it would be something like this:
[Price] to salvage quilt blocks (have a picture of the quilt and clearly mark the blocks being salvaged) and create a new quilt from the blocks (then describe the design and size of the new quilt to be made from them, with additional 100% cotton fabric to be determined)
[Price] to redo the embroidery on these sections of the quilt (have a picture of the quilt and clearly mark the blocks included) (describe the embroidery to be done)
[Price] to hand appliqué these sections (have a picture of the quilt and clearly mark the blocks included) (describe the appliqué to be done)
Although this is extra work up front, I think it helps to prevent misunderstandings and is as much a benefit to customers as it is to the server providers. They might see your estimate and never mention the quilt again, but that's probably better than hurt feelings on both sides.