Your symptoms are classic of a failing PNP switch, which is not uncommon on 850s. The part will cost you $80-100 at FCP Groton and two hours of your time to replace. Volvospeed (www.volvospeed.com) has very detailed instructions. Or, you can have your shop replace it. I just went through this, bought the part with every intention of replacing it myself and had to leave town on business, so I had my Indy do it--$167 in labor. Either way, a lot better than what you were quoted!
As an interim fix, with the engine off, 'rake' the gear selector from stop to stop about 15 times. That will generally fix the problem for a while (although your check engine light, if set, will stay on)
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96 850T, Bilstein HD, IPD swaybars
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