As I mentioned earlier, you can customize your setup project.  In particular you can set conditions on how and/or when your setup project installs on the machine.  Jeev is right in that you can check if IIS exists on your machine before your web project gets installed.  To do this, you add a Launch Condition (Rt Click Setup Project in Solution Explorer -> View -> Launch Conditions).  You then see a tree view listing the requirements you want for the target machine.  Next, go to the Action menu -> Add Internet Information Services Launch Condition.  Now you see that a Search for IIS will occur when you install this setup project.  You can customize it further by editing those Condition properties and for example check for a specific version of IIS.  I believe if IIS isn't detected, an error message will pop up and the installation terminates.

I'm not sure if using your same web setup project to install IIS is possible, but I agree that another area to explore will be the Custom Actions window (Rt Click Setup Project in Solution Explorer -> View -> Custom Actions).  There, you can specify an Install action that your web setup project does not normally do by default.  I'll try and see if I can find a more definitive answer to this part.  Please let me know if you are still stuck or if you found a solution that worked.

-Alison