Something for my 7 year old niece

While at my LYS a couple of weeks ago, I rummaged through her quite extensive half-off basket and found this:



I think it will make a charming cardi/jacket/shrug for my 7 year old niece Naomi! Soft, fluffy, and rainbow hued - looks almost like one of those clown wigs, don't you think? How cute would this be done up in a knit in the round coccoon shrug like the one Annie Modesitt designed for Interweave Knits last year? Could I modify the pattern to accomplish this? We'll have to see...