Heat exchanger/fresh water cooling
Do you know if periodic maintenance was done? As long as oil changes were done about every 100 hours with oil filter changes at least every other oil change, the engine is probably OK. This is a low dust environment so am not too concerned about the oil filter. I am sure some will think this is pushing the envelope some on periodic maintenance, but I feel that this oil and filter change interval is all right because this is a fresh water cooled engine where the temperature on the thermostat is set higher at about 180 degrees Fahrenheit. This allows the water from combustion to be driven off since the oil temperature will rise above the boiling point of water after running about half an hour with propeller loading (not running to just charge the battery). The water of combustion is bad because the sulfur in diesel burns to form sulfur dioxide and a little sulfur trioxide which form acid when combined with water. Modern diesel contains little sulfur, but this engine is old enough to have used the high sulfur diesel. Modern oils and low sulfur diesel allow longer intervals between changes. However, many boat engines are now allowed to heat up enough to get the water of combustion out of the oil by just maneuvering around the dock so the 100 hour interval is still a good one even on fresh water cooled engines.
If the periodic maintenance was not done, then consider pulling the engine and removing the oil pan to check the bearings. This is a visual inspection. If there is a gray metallic look with no copper or steel backing showing on the bearing, this is good. Even if the bearings look good, they are usually replaced, as bearings are cheap. If the bearings are worn through to the steel backing, then probably the crankshaft will need grinding. Some crankshafts journals (which ride on the bearing material) are case hardened and are very tough. I remember a two-cycle two cylinder Detroit diesel that must have run out of oil as only the steel was left in the bearing shell, but the crankshaft only needed a little polishing. Bearings are a curved piece of metal with a steel backing then copper and finally babbitt bearing material. Dirt in the oil gets imbedded to the babbitt and causes wear of the bearing and journal that rides on the bearing. Acid from sulfur also corrodes the bearings. This lower end work, the pan is on the lower end of the engine, has to be done under practically clean room conditions and I would not trust the average mechanic to do it. Have an automotive machinist do it, as they know about cleanliness and how important it is. The clearance on a bearing is between one and two thousandths of an inch. I piece of paper is about twice that thickness. If you have dirt particles larger than this, you drive the dirt into the babbitt when you tighten the bearing cap down with a torque wrench. Steam clean the engine before taking the pan off.
A compression check is the last thing to consider. If the engine starts easily and runs on both cylinders immediately with no white smoke and strong smell of diesel, then compression is probably all right. If not all cylinders are firing then raw diesel goes out the exhaust and you can smell it. This problem can also be caused by glow plugs that are defective and this is usually the cause. A compression check is simple and I think it should be done anyway as a valve could be leaking a little and the engine will still seem to start all right, but trouble is ahead. One last thing to do is check the injectors. If these have gone several hundred hours, do this check as a defective injector can ruin a cylinder wall from excess heat. An ordinary shop may not have the equipment to check injectors. A place that specializes in overhaul of injection pumps can do this. However, usually a mechanic just replaces the injectors as there is a little more money for them and they do not have to worry about testing. Injection pumps are normally very long lived as long as contaminated fuel has not gotten into them. By the way, I hope you have a very good system for filtration and water removal on your engine. If not, get this added. You do not want the engine shutting down when you need it from contaminated fuel, and also an overhaul of an injection pump is expensive