The effect on engine performance of insulating combustion chambers was simulated for a turbocharged direct injection diesel engine. We developed a low heat rejection (LHR) diesel cycle simulation. It includes a gas flow model, a heat transfer model, and a two zone combustion model. In the heat transfer model, convective and radiation heat transfer between the gas and walls was computed, taking into account the combustion chamber surface temperature swings. In the combustion model's combustion zone, the temperature and the chemical equilibrium compositions were determined. They were used to calculate the NO formation rate by assuming a modified Zeldvich mechanism. The combustion zone temperature was also used to estimate the radiation heat transfer. Simulations were performed of various combustion chamber surface materials and various LHR levels. The factors which affect thermal efficiency and exhaust emissions were deduced and their influences discussed.