An effective and compact thermal management system is essential for modern lithium-ion (Li-ion) battery powered vehicles, which involve rigorous constraints on weight and volume. In this paper, a phase change material (PCM) based battery internal cooling system is proposed by replacing the hollow mandrel in cylindrical battery with a PCM-filled mandrel, and it is tested on a fabricated steel cell. With verifying its effectiveness in cooling, as well as the accuracy of the thermal model, numerical studies are carried out on a Li-ion battery submodule consisting of 40 cylindrical batteries. Variables including PCM species (n-octadecane, n-eicosane, and n-docosane), PCM core size, and PCM core size distribution are used in the simulations to optimize the design by examining the performance indices involving temperature, temperature difference, PCM solidification time, and pack compactness. The numerical results show that the PCM cores can effectively alleviate the temperature rise inside the battery pack, and a uniform temperature distribution can be obtained when thicker PCM cores are embedded in the interior batteries. A pack compactness study indicates that the internal cooling is a space-saving design that facilitates the achievement of the high energy density of the battery pack.