I've been stuck using .Net 2.0 for the last few years and have only just had the opportunity to use VS2010 and .Net 4.
When Visual Studio 2005 is installed on a machine it provided the dot net redistributable package (dotnetfx.exe) at location C:\Program Files\Microsoft Visual Studio 8\SDK\v2.0\BootStrapper\Packages\dotnetfx\dotnetfx.exe.
I can't find a similar location for the .Net 4.0 package for VS 2010, does it give you one? Or do you have to download it? Or does it package it into a setup file if you create a setup project?
I am deploying to a closed network with no internet access, so I can't let the installer connect to a Microsoft site and download it.
If you deploy as a setup project, as you mentioned, the user will be prompted automatically to download the version of .NET associated with your project -- that being if the OS they are on meets the right criteria. You shouldn't need to worry about including any .NET redistributables, as the installer will handle it.