Since you have included SQL as a pre-requisite, if SQL is not available the setup will first install SQL. During SQL Installation you can change SQL Server settings.
In Setup and Deploy project you can write Custom Actions where you can define what needs to be done.
Once the SQL Server is installed and you app binaries are installed you can invoke these custom action and attach the database file using SQL SMO APIs.
Go through this article http://msdn.microsoft.com/en-us/library/ms165716(SQL.90).aspx
] on how to attach a .mdf file to SQL Express.
The following links may also help you.
Attaching an mdf file to a C# setup project