Could someone please post a picture showing where the thermostat and temperature sensor are located (preferably on a 2002 S40), otherwise, I will post a pic and you guys point it out.
From what I see online, the thermostat is NOT the same as the cap that closes the coolant reservoir. I am referring to the black cap that is located as close as you can get to the passenger within the engine compartment (have a look, pic of 2001 S40 engine compartment, the cap is above the left side of the strut tower bar).
If you have any resources with clear illustration of various sensors and such please forward them to me.

Remove splash guard from under the engine bay, at the bottom of the radiator on the left when looking into the engine bay you'l find a tap. Open tap and wait for the coolant to drain out.
Undo the bolts that hold the thermostat cover, engine end of the pipe that goes from the radiator to the engine block, left of the exhaust manifold when looking into the engine bay. You'll find the thermostat there, change for a new one and put the hose back.
Close tap at the bottom of the radiator, put the splash guard back.
Fill the reservoir, turn the engine on and continue to topup the reservoir as the water circulates through the system. Don't forget to turn the radiator to full heat inside the car.
Takes about 15 minutes before system full again using this method, just remember to monitor coolant levels for about a week.

Thank you very much for your reply. Although you clearly explain where the thermostat is located, would you mind verifying that the image attached does indeed point to the correct area? Thanks a million...

Your picture looks about right. Have a look at the following site for a similar how to.

http://www.matthewsvolvosite.com/tstat.php

Does anyone agree that the S40 thermostat is located where the picture above points to?