[Piotrsko]

Replace damaged boards unless the end you cut off is over a support structure like a beam.

Easiest would be to drywall with 1/4" drywall screwed directly to the paneling. Wouldn't even have to extend power sockets. Doing the top half in sheetrock would be fast and mostly straight cuts. Or you COULD use 1/8" wonderboard underlayment.

I like wainscotting and chair rail.

Imho, painted panels look like you couldn't be bothered to do something else better. However, some people like the look. Refer to my previous post.

Not sure you can easily relocate the washer combo, but you could pull the cooktop and replace with a mini stove/oven if there is a cooktop

Btw: how does this fit with your current social/family commitment