Why do you think it needs to have the rods replaced ?
Most fuel injection pump rebuilders will test injectors for free in my area.
Water in the oil could be from a simple head gasket failure.
The rods are probably fine, as I'm sure half the parts I will be replacing in the engine will be, but the same as I do when I have done the old diesel trucks, as long as I have it apart, I will replace what I can to avoid tearing apart again in the future. I have bought remanufactured engines before and had rods, cams, etc go within 10,000 miles. I bought this on a whim, as a challenge, and as a learning experience. I've always wanted to restore and customize old heavy equipment, but always had a diesel truck project in the shop, this landed in my lap for dirt cheap, and I had the room. I really want to tear the whole thing down to nuts and bolts, sand blast, re paint, modernized the cab, and give the machine another 50 years of life. I may never have a chance to do a project like this in my life again.
For $7,000 I could just drop a new engine in it and go, the biggest part of this journey for me is the knowledge and learning, if it ran, I would still probably tear it down and rebuild and customize it. We have 3 working backhoes at the ranch already.
They don't even make backhoes this big any more that I know of, at 26,000 lbs, your talking excavator this day in age. Beyond that, I don't know what it is about it, but I just find it to be a sexy machine