There are several reason why to choose this or that option, and that what makes this event the best in the entire game, this has the largest consequences and the most influence on the entire game out of all your choice (almost as much as france first or russia first or serbia first.)
Folding saves you the front, and the 200 mpp economy and 30 something units of the italian army, and most importantly the larger than the AH fleet of the italian navy. But you pay high price for it: large amount of NM, heavy temporary morale drop for your AH army, some income loss, and the Romanian entry boost, as well as an even larger temporary income loss, so the AH will be crippled for 6 month or so, and probably very vulnerable to russian overrun.
Going war with italy even gives you more NM for AH, and chance to get more NM from conquest, since many italian border cities are also morale boost for AH, but losing will have the reverse effect, so you need to defend you new front, and it will eat 4-6 units on normal versus the AI, and even more if you play on harder difficulties. If you want advance, you need even more troops, and maybe an art or two.
Don't forget, it is a CP front, so german troops can be sent too, probably even better, since they have more morale and better tech usually, so they can wipe the italian units and force france and the uk to send units to defend, weakening the western front.
Ideally you want to defeat Serbia before or at least around the italian entry, if you go against italy, so the serbian units can go to italy to continue the war (just don't forget greece.) And if the serbian wart goes really badly, you might want just fold and give up the territories, but be prepared for the romanian entry in that case.