I have a question about sealing in a room.

Curious to what the group thinks, Pros, hacks and others seeking knowledge...

I am in the process of fixing my back porch. (Indoor laundry room (W/D & Water Heater)

It currently has old wood paneling which has delaminated in many places and ready to fall off the walls.

My plan is to rip out the old paneling, and if necessary the insulation. I would like to not bother the insulation if it is in good shape. and I would like to airseal the room.

Since I can't wrap the exterior can I put wrap/paper or plastic up on the inside studs between the insulation and surface material? or is this simply going to trap any potential moisture/condensation inside the walls?

For surface material I am trying to decide between sheetrock or 1" x 10" cedar planks. I am leaning to the cedar planks, probably horiz shiplapped because that seems the easiest to mill and vert means I need to add backing for nailing.

Whatcha all think...

Room is 11' x 7' and 7.5 ' tall