I experienced situations when I was first going through a divorce that were very awkward and painful like this one--certainly not as horrible as losing this special event right along with losing their daddy at a young age--but still personally devastating. It isn't necessarily "running away from their problems" to avoid the dance altogether if it's just too painful. They are certainly facing their grief in many, many other waysm whether or not they attend this dance. They will have future situations when their dad should have been there, and they will find ways of coping. But that may be just too much to expect of themselves right now.
And it WILL be painful, no matter what. Over and over throughout the event they will be reminded that he is not there with them, after all of the anticipation and preparations. There is no good solution. It might be wonderful with their grandfather, but it would have been more wonderful if their grandfather was standing in while Daddy was out of town on an unavoidable business trip or recovering from surgery, or any other reason besides this tragic reason.
The way that I coped during the first few difficult events was to totally check out and pretend it was a regular day and not the holiday that I was missing having with my kids.
I was still dealing with the PROBLEM of being a newly single M. in all of the logisitcally and emotionally necessary ways, but it was not necessary for my recovery from the divorce to have my heart wrenched by attending those first few holiday events alone.
For me, it was easier to stay home from church that first Mother's Day, instead of being alone without my children while they had visitation with their father......and watching other mothers have flowers presented to them by their children during the service (having someone else's child give me a flower would have been nice but completely inadequate for easing the discomfort and grief)......and explaining to people over and over why my children weren't with me. (Really, why subject any mother to THAT!)
I pretended it was just another day in July, and not the 4th of July, while my children went with their dad for our traditional day of a city parade, country club picnic, and fireworks--without me. Going alone or with friends would felt been very awkward for all of us. After several months, this sort of mental escape was not necessary anymore, and traditions were adapted or re-made.
Let your daughters decidewhat to do about the dance--and be prepared for the possibility of them changing their minds at the last minute or even after arriving at the dance. They might not both decide the same thing. Offer a fun alternative as an option to distract them that weekend.
If they decide not to go to the dance, perhaps their dresses can be worn in memory of their father for future special occasions at times when it is possible to feel love and pride in his memory awhile wearing them, and not just pain at the loss. Depending on the fabric of the dresses, perhaps some of the material might be worked into their wedding dresses in his honor.
P.S. I just read S.S.'s answer. Consider her idea and have the three of you have a special girls night out. Discuss how wonderful Daddy was to rent this luxurious limo for them and share stories about him during the night. If you all cry, it will be okay, because no one else will be around, and this could become a wonderful memory of the three of you banding together as a strength for each other.