Hello Gregory!
I'd rather go with a hall effect sensor counting the teeth on the flywheel or a magnetic pickup (coil magnet, essentialy the same). At least that's how everybody is doing it today (that doesn't mean it's the right way to do it, but you have a huge line of sensors to choose from). I've seen optical measurement on some Nissan engines too, but it's not really used. I've been in the EFI (electronic fuel injection) world for quite some time, and I've never seen a successful development using a method other than what I've just written. Besides, you get expandability, because you could measure TDC (top dead center) position if you make a notch or a recess on one of the teeth in such a way that the sensor doesn't react to that particular tooth. If you don't want such a huge resolution, you could attach the sensor to the injector pump, and with the crankshaft/pump pulley or gear ratio, it's easy to know the RPM.
In a diesel engine, I see that the vibrations will be a major enemy of the reed switch setup you proposed. I don't know if it will affect the measurement, but no moving parts is always better!
Some words about the two types of sensor I just described...
Hall Effect: doesn't require heavy signal conditioning, it delivers a constant voltage pulse regardless of the RPM, it's very easy to use, but it relies on the
Hall Effect, so you need magnetized teeth or a "trigger wheel", which is a disc with a number of teeth on the edge. It also needs a power source, usually +12V or +5V, but produces also a square +12V or +5V pulse.
Magnetic Pickup: It's technically called a
VR (variable reluctance sensor). It doesn't need magnetized teeth or an external power source, but the signal is AC (alternating current), and the output voltage also varies with the engine RPM, up to 50 volts or more! So you will need a much more complex circuit than the Hall Effect sensor. The VR sensor is cheaper but lager than the Hall Effect sensor.