The design and assembly of an Automatic Optical Inspection (AOI) system is a complex process for any production scenario that considers process quality outcome and loss as an important aspect. This paper discusses the design and implementation of a laboratory-based AOI system through inspection parameter optimization for monitoring the surface condition of conveyor belt segments. The system utilizes a low-cost web camera and a line laser projection device as sensor components in a non-intrusive setup to capture color and depth images of the belt surface. A mixed-level full factorial design of experiment (DoE) approach is devised to examine how different control factors, which in this case are the inspection parameters, such as- the surface illumination, inspection speed, imaging distance, camera frame rate, and camera field of view, affect the response factor, which is the measurement error percentage of the AOI system. The error percentage is obtained by comparing the inspection results of a belt region of known dimensions with corresponding manual measurements. Comprehensive data collection runs followed by the factorial analysis revealed that all individual inspection parameters were significant except for the interaction between imaging distance and field of view. Based on the range of inspection parameter settings investigated, the optimal settings were found to be an imaging distance of 60 cm, a field of view of 75, illumination of 0 lux, an inspection speed of 9 cm/s, and a camera frame rate of 75 frames per second to achieve an inspection error of 0.26%, which is acceptable for our investigation.