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I like your answer, but I would modify it just a tiny bit. I would go back and at my old rate in as friendly a fashion as possible. But I would spend absolutely all of my spare time looking for another job asap. You are correct - this person will be let go at the earliest possible opportunity as soon as the boss is out of hot water. Knowing that, protect yourself and start looking now. I'm a firm believer in the "monkey bars" rule of employment. Do not let go of one until you have a firm grasp on the next one.
I am the same sort of person too. I prop up my phone and have stuff going on it while I work. I work in an open office plan. Having Netflix or Pandora running and headphones on helps me tune out all the chaos around me and focus on my job.
Another point to mention is that this is an unusual request from a former employer. This is not normal. The poster said he left detailed instructions on how to continue development, and they somehow can't follow them. I smell trouble here. If the poster decides to go through with it, my best advice would be to arrange payment up front, or at least stagger their payments in such a way that the last billing won't be for very much. They sound like a nickle-and-dime operation trying to get something for free, and I'll bet at wrap-up they try to weasel out of payment.
