A computational fluid dynamic analysis has been developed for studying the energy and exergy performance of an direct-injection, turbo charged diesel engine. Both First and Second Laws of Thermodynamics are employed to take into account the quantity and quality of energy. The availability or exergy analysis based on the Second Law is utilized to identify the source of losses in useful energy within the components of diesel engines. In this study, the effect of insulated combustion chamber surfaces on the turbocharged, direct injection diesel engine performance is numerically investigated. Adequate performance is obtained with the low heat rejection (LHR) engine. In comparison to a conventional diesel engine, specific fuel consumption and brake thermal efficiency can be increased. It was concluded that the exhaust gas process was the most important source of available energy, which must be recovered via secondary heat recovery devices. The available exhaust gas energy of the LHR engine was higher for the LHR engine compared to the conventional diesel engine. However, it is impossible to recover all the exhaust gas energy in useful work. It is found that the maximum extractable power is less than 45% of the exhaust power.