The new cars don't offer anything more except less vision, more plastic, and more gadgets.
If I were him, I'd pocket the money, and go with option #3. I would definitely opt for a '94 - '95 E320, fully loaded with factory CD, heated seats, cup holders, ASR etc.
Nothing beats the W124's, and since depreciation has already eaten away at most of its value, it is a lot closer to bottoming out in pricing than a 2000 + model anything. By buying a newer car, be it a Subie or a Merc, he is going to lose the extra money he invests on the initial purchase in a matter of a couple of years.
The W210 is nice, too but it is more expensive, and they have not really come close to "bottoming out". Especially '01 ~.