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Just don’t try to keep hulls around forever. Armor doesn’t upgrade and eventually the ship will just be too fragile against more developed weapons. Eventually it is better to just build a new ship.
You click with the right mouse button on its name and choose "Open design for rebuild". After that you create modified design as usual and save it. After that, use right click again and choose "Rebuild ship". New window will appear with the list of all applicable designs. Choose one.
1. Especially for large, fast ships, it's _extremely_ expensive.
2. While you replace the old engine with a new one, as @Klikkit said above, your armor will _not_ improve.
3. The underlying hull will also not be replaced and over time, the hull weakens, so it will take more damage during combat and might even spread leaks if put under high stress (high speed maneuvers, especially when already fighting leakage).
Personally, I have grown fond of reliable engines on large ships, since those keep their speed a few years longer.
I then don't replace the engines when the ship loses the first knot of speed, but do "normal" rebuilds (for guns, firecons and so on, as mentioned above) and only do an engine-rebuild after it loses the 2nd knot of speed (unless it's so old, it's no longer worth it, then it'll be scrapped).
And when it loses a knot of speed _again_ that's normally the time to finally scrap it.
When it comes to the ordinary rebuild cycle, I almost never rebuild engines. It's crushingly expensive. If you're ever tempted to do so, I recommend penciling out the cost of the rebuild versus simply building a new hull. That math is not flattering to engine rebuilds.
So, I design ships for a service life of either 20 years (one rebuild) or 30 years (two rebuilds), with no engine replacement planned. In the third decade, ships will have lost substantial speed. So, I only plan for a 30 year service life if the design will remain viable even if it's two or three knots slower. This often means adding a knot or two to a design, so that for example where I might want a 28 knot battlecruiser in 1915, I'll pay for 30 knots so that it will still be able to keep up with a 28 knot battle line in 1935, once its engines have lost a couple of knots of speed.
The other outstanding candidate for non-replacement of engines are DDs, because after 20 years of service with the battle fleet, they can be cheaply stripped of their torpedo tubes and converted into valuable minesweepers or ASW corvettes. Who cares if the engines can't produce 30 knots any more? Purpose built KEs can only make 24.
For the record, I’ve been playing since RTW I and must have a thousand hours or more invested. It is easily my favorite solo computer game, “bugs” and all.
Personally I stop building new battleships in the 1920s-30s and just refit them. As long as they are a decent tonnage (35k+) you can refit them every 10 years to a level that keeps them as relevant as they can be in the age of the aircraft carrier.
Jumping the late 1890s/early 1900s CAs and Bs up from 21kt to 24kt keep them useful in the early dreadnought fast battle line. Sure, they aren't going to duel a 6x2 12" dreadnought successfully, but as warm bodies/targets additional 12s to throw downrange in a mass fleet battle and lots of 6s to repel light craft, they're still handy.
Sure it was expensive and took some time, but it's not nearly as expensive or time consuming as designing and building a whole new class of battleships to replace them, and I can now donate the spare funds to building other ships.
At about the same time I scrapped a class of Heavy Cruisers that were as old as the BB's. I looked at the almanac and noticed they were just too slow and didnt have quite the punch or armor to stand up.