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I think a replacement engine could be had for 1200-1400. So you could dump the bad one on ebay and replace it with a good one. There are a few shops popping up now that rebuild 2 strokes. I bet if the economy keeps heading in the same direction they will look like pretty smart guys.
What makes the most sense for the type of boating you do? If you don't run that often, the fuel savings on a new engine will take a long time to get to. How often are you offshore?
There is also the smoke and thunder issue, but I say $1200 beats $12000 any day. We would all be running carb'd 2 strokes (ok fine maybe not premixed) if not for the EPA.
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I agree with Ken . . . . The least expensive / fastest recovery is to locate a good used 120 . . . and keep the other one for spare parts. At least this way you can use your boat during the summer and have some green left in your pockets.