Disk Failure: what next?

my late 2012 iMac slowed to unusuable state after Yosemite upgrade then on reboot it failed.  After verbose reboot and disk utility verify/repair I'm at the state that it is unrepairable.  So, what next?
disk utility tells me to copy everything I can, then reformat and restore what I copied.  Is it as simple as this?  Won't I still be on the same failed HDD? 
I have a cloud based backup of all my documents and settings, but not a disk image.  So I'm thinking I can do one of the following:
1). Do as I think disk utility is telling me and transfer the full disk image to and external use drive I have, reformat the internal drive, then copy the image back.  This sounds too good to be true?
2.). Get a copy of my documents from the cloud service, reformat and reinstall OS X from disc utility, copy over my documents?  I assume I would have to reinstall my apps going this route.
3). I need to get a new physical internal drive installed by an apple place and let them do the transfer ( what does that run? US$)
4) some other option
thanks for any input!

If you wish to prove to yourself the need for a new drive, then you will need to re-partition and reformat it, then install OS X on it. If it still won't work properly then the drive is probably bad. The Yosemite upgrade had nothing to do with it. A new upgrade won't kill the drive, but it can cause problems to appear that have always been present.

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