Engines with low compression can and will "run fine" when there is no load on them. But put them to work and they won't produce enough hp to perform. So yes, the diagnosis could be right.
However, what does he say is the problem? Burnt piston? Cracked head? Broken/worn rings? If so then the bucks could stack up quickly because the first two are caused by something else. (Lean burn, overheat, etc.) The last could just be wear or carbon-build up issues. If it's something relatively simple like a blown head gasket and there is no other issue, that's pretty cheap all things considered.
What were the readings and on what cylinders? What do the plugs look like?
I agree with UF, tough call, I would get a gauge and check the compression myself. If it is not consistant then you do have some problems to sort out. If the compression checks ok then start checking the fire to the plugs. If your motor runs like this when it is hot then check the plugs when the motor is hot. If you have one plug ?? that is not firing you may have coil problems or a power pack breaking down. The power pack puts out some high octane voltage and when they start breaking down, they will cause havoc. You can check them without using the high price equipment. Give us some more info after you do the checks on compression and plugs and i will get back to you. The boat will run smooth even on a bad cylinder but with less power.
The top cylinder on the right side has a place in the sleeve that is coming apart like the beginning of a hole, flakey looking with some aluminum transfer from piston, plug was pretty coked up, what would it cost to have a power head bored?
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That's not what we wanted to here. You can bore the one cylinder if it doesn't have too much damage. Labor to tear one down and do the work is not cheap and boat motor mechanics are pretty expensive. Do you know the motor enough that nothing has been worked on before like a re-bore? You can sleeve that cylinder also but marine experienced machinist needs to install the sleeve. Also, what caused that cylinder to go away, like not enough cooling or lube . That is something you need to check on too. If the mechanic thinks the cylinder is toast and thinks it is not salvagable you are in for another powerhead. I am sure someone else may chime in here that has had the very same work done to give prices etc.
Take into consideration these things:
1) the engine is 20 years old- how much is it worth versus how much to repair?
2) Something caused the cylinder damage- piston land burning due to being lean? Overheat condition? Material ingestion? Even if you fix the obvioius damage what about the original problem that caused it?
3) The inevitable "while I'm here why don't I" added expense of whatever else you find while going into the engine. What if you find the reeds are worn excessively. Or you find wiring harness issues. Or worse yet, something breaks during disassembly/assembly and you have to buy more parts.
Sometimes the old beasts just aren't worth fixing. If you can do it yourself and have the time they can be worthwhile projects but paying a mechanic $90 an hour to work on a "maybe" engine isn't worth it and that's what your mechanic told you. It sux for certain but at least he was honest.