Lots of drilling and filing of slots on the deck required to get it looking like a Type VII- I don't envy you that little job! One of the nice things about many of the later (not Darnell) Type VII kits is that they came with photo-etched or milled decks, which saves a lot of work.
A cylinder will not significantly increase the cost, unless you opt for a ready made version. Materials are quite inexpensive, if you're happy to use opaque PVC pipe instead of acrylic, then I find 110mm waste pipe is usually found in skips (unused I hasten to add) and can be recycled into something more fun. A pair of endcaps is not a big deal to rustle up, what is a little more challenging is deciding on a ballast system and how to lay it all out inside the cylinder.
The radio system in that boat looks rather ancient, probably 27mhz (did it come with a TX?). If the servos are a 3-wire type, then they may be compatible with a modern RX if fitted with newer connectors- just observe you have the wires correctly configured. With perfectly decent servos available from Hobbyking for a pound or two it may be easier to just order some new ones.
The ballast system described by Sub Driver works okay. There are a couple of disadvantages to this system, and I speak from experience as I have used it, the air sucked out of the ballast tank is high in humidity, and as you are compressing it in the forward compartment, the cold WTC walls act as a condenser and you end up with a forward compartment with very damp air- any electronics in there can suffer. The second issue with this system is that it maintains an air bubble in the ballast tank, which is vented at the bottom. As the boat dives deeper the air bubble compresses and your boat steadily gets heavier. If you are running with only a few grams of positive buoyancy, this can result in a boat which heads straight to the bottom.
If you only dive at shallow depths it doesn't have much effect, but it does become a problem below about three feet or so. If you fitted a valve at the bottom of the tank (known as a Kingston valve) this would prevent this problem.
One more thing, the ballast tank will require baffling as you have an exposed water surface. This is all covered in Norberts book.
One system you could consider is a water pump in an aspirated main tank, based on 85% of the boats overall ballast volume, and a smaller tank mounted within this large tank using a secondary ballast system, based perhaps on a water pump or a small piston tank (large syringe?) to trim the last 15% of the boats buoyancy.