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I'd believe your dealer's correct. Surely PNP switches are a fairly common problem BUT they don't cause the symtoms you've mentioned, bad internal hydraulics would.
If it were simply the PNP switch and it was then stuck in limp home mode, it'd shift normally again for a while simply by clearing the code as PNP switches are rarely (if ever) the main cause of a permanent fault (intermittant yes).
Many who've read about the PNP switch problems here simply assume that that's the only thing that ever fails with 850 trannies and that's simply not true. '95 850 trannies are known by Volvo to have a few problems requiring replacement of the trans but by now, you're no longer under factory warranty.
The reman trans includes a new PNP also btw.
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