"I have sometimes tested this kind of environment by using a function generator to be the power supply to simulate noise. For example set the output at 1 KHz with a sine wave peak to peak amplitude of 0.4 volts and a DC offset of +5volts."

And finally you finished the post saying "Have fun"

With the kind of test set ups that you have proposed, maybe we can have fun, but not the poor vendor who supplied you the encoder ! If only he had known that somebody will use a FG as a DCPS...

Have fun. Anyway ;-)

Raghu