If you're staring with raw planks... PLEASE apply the same finish to all surfaces (underside as well as topside). Otherwise, the surface with the lesser finish will tend to absorb/lose moisture much more quickly than the surface with the heavier finish, and the planks will "cup", "bow", and warp with seasonal humidity changes.
Better than starting with raw planks would be starting with tongue-and-groove planks. The tongue/groove joints helps lock each pair of adjacent planks together so they commonly bear the weight of people & furniture. The T&G joint also helps prevent dirt from dropping down between dried/shrunken planks, preventing the joints from closing again in humid weather & causing buckling of the floor. Last, it helps stop breezes from blowing up through the floor from the space below.
It's possible to install the new flooring as a "floating" (not nailed down) floor over foam insulation (mostly for thermal insulation, but there IS a little sound insulation value)... but that's a whole different type of floor and really begs for a completely different approach. If you try to install any resilient insulation under nailed planks, you'll just get "nail pop", where the nails pop up through the surface of the floor and trip you, possibly tearing bare feet. There are completely different materials available (google "pergo") for floating-floor applications.
If it were my floor... I'd leave all the original floor planks in place regardless of condition, and cover them with all new flooring, diagonal or perpendicular to the original planks' direction.
EDIT: ALWAYS allow new flooring to "season" in its destination room for several weeks prior to installation so it's in humidity equilibrium with the room, preferentially always install during the period of highest humidity and make all joints TIGHT, and ALWAYS leave at least 3/4" (18mm) gap around all edges. You'll probably need to remove any existing mopboards/baseboards & trim before flooring, then cover the gap with them after flooring.
I don't know that replacing the drywall for that little a space wouldn't be the best route. Seems the cleanest. Removing trim isn't hard. I don't know about the mirrors, though. Renting a drywall jack is cheap and makes it a ton easier to hang. A bit of demo and hanging a new ceiling sounds easier than messing around with something that isn't working out.
Beyond that, I don't know about knockdown texture, but sanding down a ceiling without a drywall sander sounds like it sucks and trying to water/scrape it sounds like it sucks and is super messy. Demoing drywall is quick.
No expert here. I'd just replace it. Seems the surest, which is the direction I like to steer.
Best Answer
I thought I’d seen this question before on this site but I can’t find it
There is a sander made specifically for this problem
Check with a floor finishing tool rental place. It is called a radiator edger or a toe kick edger sander.