To get the component cost of the Merlin down to that of the Chinook we'd need to order about 700 of the them. It's all very well saying it keeps money in the UK, but then so would have buying Rover cars and not many people seemed to like that idea.
Not sure about the Merlin being able to take direct hits, having a lot of composites in it's construction there are all kinds of problems with it even getting knocked about by Squaddies getting on and off. There was even talk of it needing extra armour before it could deploy to Afghanistan due to the higher threat level there. The Chinook on the other hand is mostly made of metal enabling repairs to be carried out with a hammer, plus with its extra lift capability it can carry bolt on armour which the Merlin would have snags with somewhere as hot and high as we're currently operating.
By the by, don't confuse the military Chinook with the civilian one, that had a particularly weak gearbox that wasn't really up to the job, the military one on the other hand can take the strain of someone trying to take off without remembering to untie it from the aircraft carrier.