Bamboo,

I suppose it's a little late now, but it would have been good to check compression and write down the numbers, then squirt oil in the cylinders and check them again, if the compression comes up, it's the rings, if it doesn't it's the valves.

Now that the engine is out, I suggest that you pull the head, it will cost $400 or $500 to do valves, guides and possibly head surfacing, if needed.

The crankshaft is hardened, and unless it has lost oil pressure under load at one time or another will not have to be turned. Your best bet is to bore the cylinders, assuming they are currently standard and have never been bored, and replace the piston/ring package. Pistons and rings will cost about $800, get the pistons/rings before taking the block to the machine shop so they can fit the bores to the pistons when boring.

Don't be tempted to replace the liners and bore standard to reuse the pistons. This is a diesel and the pistons are highly stressed, I have come very near ringland failure in an aged engine. I still have the piston as a momento, and it was just about to let go.

With the bores in good shape, new main and rod bearings and a valve job, coupled with frequent and hot oil changes, you will be able to run this motor several hundred thousand miles thereafter with no problems.

You will be looking at a bare minimum of $1,500 before you're done. Look around and find a machinist who has done several of these engines, his experience will pay off for you.

Best of luck,