GM,
I recently had to put down my 2001 XC70 at 225K miles. I had the Beast for 12 years and recent years, she was in the shop almost as much as she was on the road. I have a lot of questions for you. Did you recently change tires?? If you did I hope you changed all 4, because if you changed 1 or 2, you accidently killed your transfer case!! Do you experience bad shifting going from second to third (mine was an automatic and yes it shifted awfully, it almost felt like someone punched me in the back!!) The Volvos of the early 2000's are notorious for tranny issues. Is your car using lots of oil?? When did you last change the timing belt?? If you have 160K, it will be coming up in about 2 years, that's about another $1K. How are your shocks and struts??

All of the above work I had to perform in the last 3/4 years on my car and none of this work was cheap. I loved the car, but it was time to let her go....

$2K is fair for the transfer case work and get a guarantee on the case and labor. You really don't want to revisit the shop if the case fails.

Looking back, I think I should have cut my loses earlier....

I hope this helps.