My apologies, Stephen, it's because I don't have the Execute in Terminal action for some reason (was this a third-party add-on?), so couldn't test it precisely in the same way. But the reason it didn't work is because there ought to be semicolons terminating each command line:
echo -n "Enter new folder name: ";
There should also be double quotes surrounding $new_project_name as an argument of mkdir to handle folder names with spaces:
it seems you are using an old version of my “Execute a Script in Terminal” plugin. Go here for the latest version, which allows you to use KM variables and is also updated for KM8. 
But for your purposes here you don’t need that plugin (unless I’m misunderstanding). It works better with the KM standard action “Execute Shell Script”:
(The sole purpose of my Execute in Terminal plugin is to run a shell script open in the Terminal, as opposed to the “normal”, hidden shell.)
 Before you download a macro or a plugin from a thread on the forum, it is always a good idea to scroll down towards the latest post in the thread of that macro/plugin. This is because when the author of the macro/plugin posts an update after a couple of weeks or so, he is no longer allowed to modify the original post. Hence you’ll find the latest versions of macros/plugins often in a separate, later post on the thread.