confusion after rails upgrade

Hi all,

I'm a periodic ruby / rails user, every time I come back to it I end up
feeling unsure about what's going on, I'm hoping someone can clarify!

I have a project that I've used as a 'template' project for a while,
it's called users_with_logon and it basically has some authentication
set up for normal users and admin users.

What's important for this question is that it was made using rails 3.0.0
about a year ago.

I'm now working at a new place of work, and setting up ROR again on a
different machine, and cant get it working. From looking at the site
http://rubyonrails.org/download I want to start using Ruby 1.9.3, and
Rails 3.2.

I've installed ruby 1.9.3 using rvm, and set up a gemset called
1.9.3@rails3

whilst using this gemset I've installed rails with 'gem install rails'

From any random directory a terminal output looks like this :

$ ruby -v
ruby 1.9.3p194 (2012-04-20 revision 35410) [x86_64-darwin10.8.0]
$ rails -v
Rails 3.2.3

However when I go into the root directory of the 'users with logon'
rails app template I built a year ago I get

$ ruby -v
ruby 1.9.3p194 (2012-04-20 revision 35410) [x86_64-darwin10.8.0]
$ rails -v
script/rails:6:in `require': cannot load such file -- rails/commands
(LoadError)
  from script/rails:6:in `<main>'

Can anyone explain why the system cannot find rails from within my old
app?

I want to make the next app as up to date as possible, but would rather
not copy all the code over, what's the best way to update my old users
with logon app so that it runs on my 1.9.3 / 3.2.3 system?