so i take it that the bad gas millage is due to the stock 4 speed trany right?
also guessing from the prices of a diesel and all its parts i could be looking at around 6k right + a 5 speed? Im really eager to get this thing rolling I just dont want to put anything in thats going to make me feel like a slug going up hills on the highways
also what about a 4 cylinder turbo diesels?
wait, your petrol is cheaper than diesel?? wow. for me thats insane. over here where i am diesel is the cheapest fuel.
the 4 speed box isnt the main cause of bad fuel economy. the only difference between the h42 and h55 is that the h55 has a 0.845 ratio final drive in its top gear, whereas the h42 has only 1. that means the difference between the 2 will only be apparent when in top gear and at speed. an h42 and an h55 with matching diffs and tyres and going along at 30mph will rev the engine at the same speed.
in my part of the world where pretty much all cruisers are diesel and where everyone wants a diesel, the accepted cruiser mpg is 7kms/L, or 16.5mpg. thats right across the board from the 1HZ 70 series to the 1HDT 100 series. the reason isnt just the engine. a cruiser is a big heavy car. its not and never was designed to be efficient. it was designed to go any where and to be unbreakable.
@cruizerbuddy has a great idea if you want MPG. the 3B is a great diesel motor, but it does lack the power of the 12HT. but it will give much more MPG. having said that, you will feel it going up hills. thats from my own experience. the 12HT on the other hand has more than enough power to move a 40, going up any kind of gradient. remember that the 3B is normally aspirated, so altitude will effect it. the 12HT, with its turbo, wont feel the effects of altitude the same way a normally aspirated engine will.
at the end of the day, you are the one who has to make the decision. its your 40 after all

personally, i would go for a 12HT bc i have experienced a lot of engines in my 45's, 2F, 2H, 3B and 12HT. of all of them, hands down, the 12HT is by far the best. and spares, although are becoming rarer, will always be around. you just might have to look a bit harder
put i promise you this, drop a good 12HT properly into your 40 and you WONT be disappointed.
my $0.02