Yes I think you're right. After a further round of discussions, with no really significant improvement, we've told the servicing dealer to proceed with the engine swap.
That doesn't mean we've given up on hassling Volvo, but we do want the car back and working and will probably pursue them further once it's fixed.
I'm sure if this was a diesel engine they'd be being a lot more generous 
I think having picked up my S8 from the D2 Doctor has maybe put me in a more positive mood as I know that almost anything on a car can be fixed with appropriate ingenuity, but a borked cylinder/block isn't one of them.
And at the end of the day it's pretty much just a tarted up Ford Focus, apart from the engine. 
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2003 D2 FL S8. Irish Green Pearl/Beige. Solar sunroof, auto-dim mirrors, electric rear seat functions, ski hatch retrofit; extended leather. Aftermarket DVB-T, reversing camera and full XCarlink (Bluetooth etc.).
2016 Volvo V40 T5 Cross Country (4WD) with ALL the toys including adaptive cruise etc. etc. Osmium Grey with Blonde/Charcoal leather interior. Polestar performance "optimisation".  (A much rarer model than a D2 S8 by the way!) Oh, and a brand new engine at just under 30,000 miles on the factory one! 
Finally: gone, but not forgotten.....
1998 D2 PF S8. AgateGrey/Platinum. Every option (I think) except electric rear seats, tiptronic steering wheel, ski hatch, towbar & dimming door mirrors.
e.g. Cruise control, NavPlus/TV, Bose, GSM, Xenons, Solar roof, Parking sensors, Alcantara/leather everywhere of course.  (internal dimming mirror added later)
1998 (very early) Ford Focus 1.8 Zetec; ABS/TCS, Heated screen/mirrors, Aircon, Auto-dim mirror, Leather, Trip computer, Cruise control, OEM Ford SatNav with CD changer.
And before that a lot of Rover 800s, a few oddities, a lovely Triumph Dolomite 1850HL with Overdrive and way back in my schooldays an Austin Seven aka Mini 850!
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