Thanks everyone
@Carla - we took her to Sesame Place this summer so we knew she'd react well. I was worried about the other kids so I encouraged the other parents to tell the kids in advance so they wouldn't be caught off guard. It seemed to work, some kids were slower to warm up than others but by the end of the night every kid had given Elmo a hug. At one point he was down on the floor rolling around with the kids!
ETA: @msual and strunella - A girl I used to work with does cakes as a side business, she did this one and her cake last year too. She is really great and way cheaper than what a bakery would charge.