As to whether a 120K+ project like you propose will add what value to a home, the answer is to talk to your real estate agent. In general, the loss of bedrooms devalues a home, but the addition of a bath increases the value, but not by as much as you spend. But it all depends on the area in which the home is located. An addition may make more sense from a financial return aspect. More square footage is always a bump in value.

In general, I'd say YES- ditch the extra bedroom and get another bathroom, up. 3-2, in my area, is preferable for sales in my area. But I can't speak to how that affects your values in yours. Check in with an experience Realtor or two, for an opinion. Start with the people who just sold you the house.

Sophie- Americans simply don't live the way they used to, 100 years ago. Maureen makes a great point- A family, these days, is hardly going to want to pack 4 bedrooms with only one bath. Not functional.

I like that you bring in costs. OP does need to consider what might be discovered, during a remodel in a 100 year old home. YIKES... But they plan on staying there for 10 years, and they've already bought the house. So The cost benefit for them might be worth it.

I say this all without knowing the area, nor what modifications to a property of this age does to the value.

a 3 bedroom 1 1/2 bath sure beats 4 bedroom 1 bath on the wrong floor, in my book. one is usable, one isnt.