When you turn the key the 4matic light should light up with all the others, SRS, Check Engine etc, and then go out when the car is running. Find a gravel patch and put a few wheels in the gravel and accelerate, the triangle in the centre of the speedo should illuminate when the 4 matic becomes active. It may only stay on for a second or two. Do a tight slow speed turn to make sure there is no binding or shuddering - if there is forget about that car.
With a 4matic 124, the most expensive repairs in order of expense are:
Transfer Case
Transmission
Head Gasket

Unfortunately all three are inevitable... I know.