In this analytical investigation, preheated palm oil was used in the direct injection diesel engine with various optimization methods. The main purpose of the optimization was to get better results than the conventional engine. Raw palm oil was heated using the heat exchange process to reduce the density and viscosity. The relationship between the output process and factors response was evaluated in the design of experiment methods. The Taguchi method is an important method for optimization of the output response performance and emission characteristics of a diesel engine. Two important factors—output and input—were calculated. The input factors considered were preheated palm biodiesel blend, torque, injection pressure, compression ratio, and injection timing. The output factors calculated were smoke opacity, carbon monoxide emission, and brake-specific fuel consumption by using the signal-to-noise (S/N) ratio and analysis of variance. Carbon monoxide was most impacted by torque conditions through injection timing and injecting pressure, and opacity of smoke emission. Among them, injection timing had a higher impact. Different biodiesel blends were prepared: B10 (90% diesel + 10% oil), B20 (80% diesel + 20% oil), B30 (70% diesel + 30% oil) and B40 (60% diesel + 40% oil). Silver nanoparticles (50 ppm) were constantly mixed with the various biodiesel blends. The smoke opacity emission for the biodiesel blend B30 + 50 ppm silver nanoparticle showed the lowest S/N ratio and achieved better optimum results compared with the other blends. The blend B30 + 50 ppm silver nanoparticle showed the lowest S/N ratio value of 9.7 compared with the other blends. The smoke opacity, carbon monoxide emission, and brake-specific fuel consumption of all the response optimal factors were found to be 46.77 ppm, 0.32%, and 0.288 kg/kW·h, respectively.