Having a house from 1913, I can say, going down to the studs is the best way to go, but it's a LOT of work (TONS OF MESS). It can be very cool to see what is in there when you do. I found some old wiring and pipes running through the walls from when the house was built.
Somewhere I heard that they were making a 1/4 thick drywall for redo jobs like yours. I would see if you can find it near you and put it in place over the existing walls. Get metal face plates for the electrical, loosen the outlet or switch and then use the face plate to pull it up to the right level (flush with the new wall).
IMHO, with LP walls, stuf finders are useless. Get a small drill bit and run some tests (drill some holes) to find studs. As you are covering the whole wall, there is no down side to this.
You may want to see if you can hang the walls yourself and get someone to do the taping and mudding. If you do the taping and mudding yourself, get a wide metal blade to smooth the mud with. My favorite is about 9 or 10 inches wide. There is a sander that attaches to a shopvac and uses water as a filter to keep the dust down. Small ones work great and do not cost an arm and a leg (you will need a shopvac too).
How hard this is depends upon how picky you and your wife are about the look. If you have the time, it's some great skills to learn as being able to move walls and doors and stuff is very handy in an old house (l have lots of experience here).
I am in Chicago and working on building some built-ins next, just finished refinishing my kitchen floor (maple hard wood) otherwise.....
One approach is to have someone come in and do it, you help them. This gives you the chance to learn and reduces the hours and cost. Perhaps you do this for one room and then you do the next?
Email me if you have questions.
B2 (;->