I hate to throw things away... I posted a while back that my barrel doesn't align right with the extension on. My question now is would it be possible to install the extension, and then plug the old gas hole and drill new sight block and gas holes? Or am I just crazy?

Second question, how does the indexing pin fit into the extension? I've tried to get it in, but it just doesn't want to fit. Looks like the hole in the extension might be too small. Got both parts from Bushmaster.

Yes, I think you are crazy.  No not really, but frustrated.  You will see your problem posted on this site all the time.  "the dreaded canted front sight" problem.  If you want a quick and dirty fix, trash the original front site and replace it with an Armalite unit that is held on by two allen-head bolts.  It clamps on rock solid and it will allow you to get a mechanical zero.  I installed one on a crooked Bushy.

You will see a lot of solutions and gunsmithing remedeys but the problem is the alignment pin on the barrel extension is not indexed properly with the front sight. One fix is to remove the sight pins align the front sight and ream the holes and re-install the pins.

I've heard people say they open up the slot on the upper receiver to get the barrel to cock to one side but to me thats just creating another problem to solve one.

Headspace with bolt till correct, drill into barrel, press extension pin on.  Old gas hole can be welded or screwed; just don't expect the best accuracy from this barrel.

Another way is to trash the existing sight,install a new low gas block attachimg with allen screws,and put the barrel on a flattop with a scope.The pin does go in, try a press.