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To install plywood on the wall, apply construction adhesive in a series of zigzags to the back of the paneling. Press in place against the existing dry wall, and use finish nails around the perimeter to hold the paneling in place while the adhesive dries.
After the plywood is in place, determine the general layout of the wall, including the height of the chair rail (32" to 42" from the floor), and cut the lumber and molding to length with a miter saw. The baseboard is 1" by 6" oak lumber; the chair rail is 1" by 4" oak lumber topped by decorative cap molding; the crown-molding assembly is made from 1" by 6" oak lumber topped with crown molding; side framing pieces are 1" by 4" oak lumber. Cove molding frames the inside edges of the top and bottom of the paneled wall.
Use construction adhesive and finish nails to install the chair rail and decorative cap. Install the baseboard with construction adhesive and hold it in place with finish nails driven with a pneumatic air gun.
Install the crown-molding assembly (1" x 6" oak topped with crown molding) (Image 1). Install the vertical pieces at the sides of the wall, and finish by framing the interior of each square with cove molding (Image 2).