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Looks just like the transom on mine.-----The 16" high stringers were also in bad shape on mine.----Piece of plywood in front of the fuel tank was also broken.
Was the original starter inspected before beer tokens were spent on a new one ???-----He stated " brand new starter " in post #1.-----" BRAND NEW " would indicate a factory replacement and not a cheap one from an online merchandizer !!
A stainless prop might rattle when shifting on land.-----I suggest you visit your local friendly shop for advice.----If something is wrong it can lead to expensive repairs.
Pinion gear and forward / reverse gears are all turning when motor runs.----The clutch dog slides on the propshaft and engages the turning gears.----It is violent and makes noise.
Use this motor on a racing type boat.----Or sell it on E-bay.-----Best chance to find a few eager bidders on this motor.----Collecters will pay amazing beer tokes for one of these.
Those old 40 HP lower units were durable.-----Precision parts.----Therefor no shimming required.-----Easy to fix.------But they do not look " modern " enuff for some folks.
Do not spend any beer tokens until compression is resolved.----The 60 PSI is either a bad gauge or blown head gasket or a worn out / damaged powerhead.
Post the compression values.-----You push the key in and hold it in while cranking it over.----Replace flywheel key and torque flywheel nut.----Sounds like it will fire right up after all the work that was done !