The diesel sound is often pistons hitting valves. It is not necessarily the end of the world as the M42 is fairly tolerant of this. Reasons for this could be that the cam sprocket bolts are not tight and they shifted the timing by a few degrees (the sprockets are slotted), or because the chain jumped a tooth.
Another common reason is a failure of the deflector sprocket that guides the chain around the thermostat region. This can be checked for with a magnetic oil pan drain plug (you will find the bearings stuck to the magnet, or maybe a VERY strong magnet swept around the bottom of the pan from the outside to try to pull any debris to the outlet. There are 6 balls, plus plastic bits from the race that holds them. It is highly recommended to fish all of this out or it WILL end up in the oil pump, and that causes significant damage to the engine.
If it is the sprocket: This is a fairly large job to fix since you have to remove the crank damper to get the lower cover off, and at that point you may consider a full timing case rebuild if the parts are all the original stuff which got design updates later on. In that case, the best option is to switch to a 1994-1995 M42 timing case because it eliminates the deflector sprocket entirely in favor of another solid plastic guide. You have to drop the oil pans to swap cases, but you can do it without removing the head if you are clever and patient (I have done it a couple of times). Pulling the head is a safer way to do it, but it gets expensive since you have to have it machined flat.
When the sprocket bearings go, there is a good chance that the timing case gets damaged, and you can actually have the whole mounting post snap off a few thousand miles after replacing the sprocket (I learned this the hard way). Given that a replacement sprocket is like $200, it is a better deal to swap in a used late-M42 timing case. Just be sure to use the corresponding gasket between it and the block if you do this.
http://www.realoem.com/bmw/enUS/showparts?id=BE53-USA-04-1994-E36-BMW-318is&diagId=11_6003http://www.realoem.com/bmw/enUS/showparts?id=BE53-USA-04-1994-E36-BMW-318is&diagId=11_1370