Automatically generated menu

Yes! Yes it can, you will need to hook into the filter used by the walker, e.g.:

add_filter( 'walker_nav_menu_start_el', 'menu_show_project_post', 10, 4 );

function menu_show_project_post( $item_output="", $item = '', $depth="", $args="" ) {
    global $post;

    if ( is_array( $item->classes ) ) {
        $query = false;
        foreach( $item->classes as $class ) {
            if ( $class == 'project_posts') {
                $query = true;
                break;
            }
        }

        if ( $query ) {
            $the_posts = get_posts( array(
                'post_type' =>  'project',
                'numberposts' => 5
            ) );

            if ( ! empty( $the_posts ) ) {
                $new_html[] = '<ul class="sub-menu">';

                foreach( ( array ) $the_posts as $post ) {
                    setup_postdata( $post );
                    $new_html[] = '<li class="menu-item">';
                    $new_html[] = '<a href="' . get_permalink( ) . '" class="depth-' . ( $depth ? $depth + 1 : 2 ) . '">';
                    $new_html[] = the_title('','',false );
                    $new_html[] = '</a>';
                    $new_html[] = '</li>';
                }
                wp_reset_postdata();

                $new_html[] = '</ul>';

                $item_output .= implode( "\n", $new_html );
            }
        }
    }
    return $item_output;
}

With this code in functions.php, any menu item containing the class ‘project_posts’ will be given a submenu containing 5 posts of type project.

Modify the code as you wish to show however many posts or post types as you want