I think most of the important stuff has been covered. From your laser
dimensions I'm assuming a HeNe laser and thus a pretty good beam
quality, not a diode laser pointer. Check your spot size to be sure
it's okay, at your target, after reflection from the mirror, because
that spot size will ultimately limit how small a motion you can detect
and it will grow proportional to distance so you can't beat it by
getting further away. Only point I haven't seen mentioned is that the
mirror needs to be mounted on the end of the shaft so that the shaft
axis lies in the reflecting plane, and the laser beam needs to be
perpendicular to the shaft axis. That way you just get mirror rotation
as the shaft rotates. Any distance off-center and you get a mix of
translation and rotation and there goes your measurement. I'd suggest
drawing two light rays some rotational angle of the shaft apart, both on
center and some distance off center, to get an idea of what precision
you need for this setup.

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Regards,
Carl Ijames carl.ijames at verizon.net