I've now successfully reproduced the issue in the virtual machine.

Firstly, at the installer boot menu, choose Expert Mode.

This allows selection of each installer step from a menu and causes
debconf to ask many more questions.

At "Install the System" choose a "normal" installation and then for
"Drivers to include in the initrd:" choose "targeted: only include
drivers needed for this system".

syslog shows:

May 17 22:55:29 base-installer: info: Using kernel 'linux-generic'
May 17 22:55:29 base-installer: warning: Failed to get debconf answer 
'base-installer/kernel/linux/initrd'.
May 17 22:55:29 base-installer: info: Setting do_initrd='yes'.
May 17 22:55:29 base-installer: info: Setting link_in_boot='no'.
May 17 22:55:29 in-target: Reading package lists...
...
May 17 22:56:21 in-target: Running depmod.^M
May 17 22:56:22 in-target: update-initramfs: deferring update (hook will be 
called later)^M
May 17 22:56:22 in-target: Examining /etc/kernel/postinst.d.^M
May 17 22:56:22 in-target: run-parts: executing 
/etc/kernel/postinst.d/apt-auto-removal 4.4.0-21-generic 
/boot/vmlinuz-4.4.0-21-generic^M
May 17 22:56:22 in-target: run-parts: executing 
/etc/kernel/postinst.d/initramfs-tools 4.4.0-21-generic 
/boot/vmlinuz-4.4.0-21-generic^M
May 17 22:56:22 in-target: update-initramfs: Generating 
/boot/initrd.img-4.4.0-21-generic^M
May 17 22:56:22 in-target: mkinitramfs: failed to determine device for /^M
May 17 22:56:22 in-target: mkinitramfs: workaround is MODULES=most, check:^M
May 17 22:56:22 in-target: grep -r MODULES /etc/initramfs-tools/^M
May 17 22:56:22 in-target: ^M
May 17 22:56:22 in-target: Error please report bug on initramfs-tools
May 17 22:56:22 in-target: ^M
May 17 22:56:22 in-target: Include the output of 'mount' and 'cat 
/proc/mounts'^M

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https://bugs.launchpad.net/bugs/1582899

Title:
  in-target: mkinitramfs: failed to determine device for /

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