Building A Cheap DRO

I'd like to add a 3 axis DRO to my mini-mill. I've investigated the
Calareo/Wholesale tool import digital machine scales & readout box,
nearly $500 to cover all three axis. So what I had in mind was some
encoders from US Digital, something like 2000 PPR?? to get 0.0005"
resolution, use a simple wire under tension wrapped around the axle of
the encoder to convert the linear motion to rotary. Use an old laptop
& printer port & available software for the readout.

My questions are the mechanics for the encoder.
Would a 1000 PPR encoder give me the resolution required if I used
0.6369" diameter hub on the encoder as opposed to a .3183 diameter hub
which would only yeild a .001" resolution. Or am I better off using a
2000 PPR encoder with the .3183 hub? (The .3183 is a rough calculation
required to convert 1" of travel into 1 rev on the encoder).

Secondly, when calculating the hub diameter, how do I account for the
wire diameter in the calculation? Is it 1/2 the wire diameter +/- the
hub diameter???? Thanks.