I'm not sure about the E320, but my E420 already had cold air induction. It takes air from a scoop in the front of the car and routes it through the negine space, through the filter, and into the engine.
Another thing you'll need to worry about is filtration efficiency. If you're getting the claimed HP increase because the filter is less constricting, then it will also be letting more grit into the engine. That's not good. I'd stick with MB filters and design. If it were that easy to SAFELY get more horsepower out of an engine, I think MB would have already designed in such a system.
1995 E420 71k