After way too many experiments, I've come to the conclusion that Windows Installer is simply bad technology. But the customers want MSI files.
So, how can I create an MSI file that extracts an EXE file to a temporary directory and runs it with options same or similar as were passed to the EXE file?
Options to an MSI are explained in Msiexec (command-line options) (low level "run" of an MSI is msiexec option package.msi).
EDIT: mjmarsh's WiX solution looks like it works. I just haven't had a chance to try it yet (crunch time). If it works, I'll be accepting it.
EDIT: it does not work. Missing piece: attended/unattended does not seem to be available.
Anyway, the only to make this work at all would be for the custom action to kill its parent process!
EDIT: So somebody posted as a further answer wrapping the whole thing as a post-install custom action. Theoretically possible but since a reboot may be required (thanks MS for .NET 4 requiring a reboot sometimes) we have to do further hackery. So from the matrix of advantages:
Transparency: No. One big custom action.
Customizability: No.
Standardization: No.
Management and reporting: No. Appears to work but will not.
Security: No benefit.
Validation: No. The hackery required to survive reboot makes this sure to not work.
Resiliency: Completely defeated.
Rollback: No. Rollback didn't work when we were using MSI anyway.
Patching & Updates: No. We have a local solution anyway.
Logging: No. Appears to work but will not.
No point.
Adding to weir's answer, change the custom action attribute like below:
<!--Run Action-->
<CustomAction Id="RunWrappedExe"
Return="asyncNoWait"
FileKey="ApplicationFileId"
Execute="deferred"
ExeCommand=""
HideTarget="no"
Impersonate="yes"/>
Setting Return=asyncNoWai does not wait for the exe to return. The installer does it's job and closes normally. Meanwhile, the exe continous its execution.
-Madhuresh