I think 5 is pretty young, but there are a number of good guitars for kids. You'll want a smaller size guitar that is easy to play, but is built to take some abuse. For my kids about ten years ago I found a new Oscar Schmidt steel string guitar with a laminated top that worked out well until they moved on to larger instruments. I'm looking at a current Elderly Instruments (Lansing, Michigan) and they have a selection of child-size guitars (Strunal (nylon), Fender/Squier (steel)) in the $100-200 range. They also have some Martin mini-guitars for $400-900, but I think that is excessive.

Children's guitars are typically pretty beat-up, so be wary of used ones in need of repair. (I know the Oscar Schmidt that we have isn't worth selling at this point.) If you can find a used one that isn't beat, consider yourself lucky...when I was looking, I couldn't find one, so I went with a new guitar that cost around $100.

Hope this helps,
-Greg