Honestly get a second opinion and don't tell the next place that you had
anyone else look at it.
Good luck

I have a 94 Turbo 850 and from time to time the same thing happens, plus the
transmission locks in thrid gear in "limp home" mode. Turning off the engine
for a few seconds has always brought the transmission back to full operation
and the lights turn off in their good time. The dealer has always said that
it's a transmission code that doesn't recur (until the next time) and if
that's all that happens it's not worth trying to track down the problem.
They've certainly never suggested replacing the transmission. Of course your
cause may be different, but I suggest not doing anything about it and seeing
what happens.

I've got exactly the same problem, only my 1996 850 has only 63,000 miles on
it.

I got the flashing up arrow/check engine light/limp home in third 3 times in
one week.  I found that it works better in "economy" mode.  If I switch from
"economy" to "sport" the problem will appear within a mile or so of normal
driving.   I took it to my mechanic, who read out a "Solenoid B Malfunction"
code and sent me to his favorite tranny shop.  Tranny shop said "we can't
work on that model" and sent me to the dealer.  Dealer says I need a new
transmission for $3200.

I did some checking, on the WWW and telephone, and here's what I learned.
If you find the right Volvo mechanic (clearly not the dealer, at least not
my dealer), he can possibly replace the solenoids without even removing the
transmission from the vehicle.  Other than that, nobody seems to rebuild
these beasts.  You have two choices, buy a new one from the factory for
$2200, and pay someone $1000 to install it or buy one from a salvage yard,
for $500-$1000, and pay someone $1000 to install it.

I tried to see about buying the solenoids, thinking I might just wing it
(what've I got to lose?).  But Volvo doesn't sell them.  The only part my
dealer sells is "Transmission - $3200"  Not to mention that I'll probably
need to replace some gaskets between here and there.

So, I'm screwed.  Why?  Our old Volvos were great cars .I had a '76 262
while my wife had a '78 264.  Both beautiful cars, both went 20 years and
over 200Kmiles (the 264 went to 375K).  Then I had an 87 240 while she had a
89 240.  Both good cars, not great like the 260s but neither ever needed a
$3200 anything.  Of course those were all RWD manuals.  Now we both have FWD
automatic '96 850s.  Is it the just the automatic that sucks?  or is it the
FWD series?  Should I just blame Ford and move on?

Meanwhile, though, (and now I'm getting to the point of the post),  the
problem is intermittant so the solenoid isn't burned out, but I can
exacerbate the problem by switching to "sport" mode so it's probably not a
loose wire.  I figure there's a chance that the solenoid is just wedged with
a bit of gook or perhaps just gooied up from years of neglect.  I requested
that the dealer power-flush and replace the fluid.  That was almost a week
ago and the problem hasn't recurred yet, but I haven't had the guts to
switch to sport mode yet.  Maybe if I keep my fingers crossed, never switch
to sport mode, and get it flushed every year it'll keep working.  I guess
I'll never take it on a trip.  Someday it'll flat-out give up and then I'll
have to have it towed to the dealer and pay the $3200.

I'm never buying another automatic, and probably not another Volvo.