What's your app written in (C#, VB.NET, Java, etc.) and what installation system are you planning to use for it (Windows Installer, InstallShield, Inno Setup, etc)?
Been a while since I used Inno Setup, but the scripting language supports COM Automation so you should be able to invoke ADO/SMO to create a database instance, and then either populate the database from a backup, or create your schema and data from SQL scripts as part of your installation package.
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