I usually advise to use open-source WiX Toolset, which is the most legitimate in relation to MSBuild and Visual Studio, and is generally a very good product, much better than deprecated and removed from the bundle Visual Studio Setup project template. Please see my past answers:
Custom setup project[
^],
installshield and Visual Studio 2012[
^].
As to the SQL Server product, you can bundle it with installation, but much better approach, in most cases, would be just to claim it as prerequisite. One thing is: main project is commercial, and all versions are proprietary. Your users may already have a license for some other (commercial) versions of the product, so you would not want to force them into installing yours. This is just one of the reasons. You decide though.
—SA