I did a project like this with the kindergarten class that I volunteer for. I just had them color on paper with fabric color crayons and than I ironed that onto 100% cotton.
If you want your daughter to draw pictures that younger ones can color I would go with the fabric pens that most craft and sewing store carry. Just make sure that you tape the fabric down securely on a flat hard surface. :-D
Sharpies might be Ok but practice first.