diff --git a/railties/lib/rails/app_rails_loader.rb b/railties/lib/rails/app_rails_loader.rb
index aae628290df32..4a17803f1c7c9 100644
--- a/railties/lib/rails/app_rails_loader.rb
+++ b/railties/lib/rails/app_rails_loader.rb
@@ -4,28 +4,7 @@ module Rails
   module AppRailsLoader
     RUBY = File.join(*RbConfig::CONFIG.values_at("bindir", "ruby_install_name")) + RbConfig::CONFIG["EXEEXT"]
     EXECUTABLES = ['bin/rails', 'script/rails']
-
-    def self.exec_app_rails
-      original_cwd = Dir.pwd
-
-      until exe = find_executable
-        # If we exhaust the search there is no executable, this could be a
-        # call to generate a new application, so restore the original cwd.
-        Dir.chdir(original_cwd) and return if Pathname.new(Dir.pwd).root?
-
-        # Otherwise keep moving upwards in search of a executable.
-        Dir.chdir('..')
-      end
-
-      contents = File.read(exe)
-
-      # This is the Rails executable, let's use it
-      if contents =~ /(APP|ENGINE)_PATH/
-        exec RUBY, exe, *ARGV
-
-      # This is a Bundler binstub. Stop and explain how to upgrade.
-      elsif exe =~ /bin\/rails$/ && contents =~ /This file was generated by Bundler/
-        $stderr.puts <<-end_bin_upgrade_warning
+    BUNDLER_WARNING = <<EOS
 Looks like your app's ./bin/rails is a stub that was generated by Bundler.
 
 In Rails 4, your app's bin/ directory contains executables that are versioned
@@ -45,14 +24,34 @@ def self.exec_app_rails
   bundle binstubs some-gem-name
   git add bin/new-executable
 
-        end_bin_upgrade_warning
+EOS
+
+    def self.exec_app_rails
+      original_cwd = Dir.pwd
+
+      loop do
+        if exe = find_executable
+          contents = File.read(exe)
+
+          if contents =~ /(APP|ENGINE)_PATH/
+            exec RUBY, exe, *ARGV
+            break # non reachable, hack to be able to stub exec in the test suite
+          elsif exe.end_with?('bin/rails') && contents.include?('This file was generated by Bundler')
+            $stderr.puts(BUNDLER_WARNING)
+            Object.const_set(:APP_PATH, File.expand_path('config/application', Dir.pwd))
+            require File.expand_path('../boot', APP_PATH)
+            require 'rails/commands'
+            break
+          end
+        end
 
-        Object.const_set(:APP_PATH, File.expand_path('config/application',  Dir.pwd))
-        require File.expand_path('../boot', APP_PATH)
-        require 'rails/commands'
+        # If we exhaust the search there is no executable, this could be a
+        # call to generate a new application, so restore the original cwd.
+        Dir.chdir(original_cwd) and return if Pathname.new(Dir.pwd).root?
+
+        # Otherwise keep moving upwards in search of a executable.
+        Dir.chdir('..')
       end
-    rescue SystemCallError
-      # could not chdir, no problem just return
     end
 
     def self.find_executable
diff --git a/railties/test/app_rails_loader_test.rb b/railties/test/app_rails_loader_test.rb
index 0402989705102..f1f9119966a8f 100644
--- a/railties/test/app_rails_loader_test.rb
+++ b/railties/test/app_rails_loader_test.rb
@@ -1,48 +1,62 @@
+require 'pathname'
 require 'abstract_unit'
 require 'rails/app_rails_loader'
 
 class AppRailsLoaderTest < ActiveSupport::TestCase
+  def write(filename, contents=nil)
+    FileUtils.mkdir_p(Pathname.new(filename).dirname)
+    File.write(filename, contents)
+  end
+
+  def expects_exec(exe)
+    Rails::AppRailsLoader.expects(:exec).with(Rails::AppRailsLoader::RUBY, exe)
+  end
 
   setup do
-    File.stubs(:exists?).returns(false)
+    @tmp = Dir.mktmpdir('railties-rails-loader-test-suite')
+    @cwd = Dir.pwd
+    Dir.chdir(@tmp)
   end
 
-  ['bin/rails', 'script/rails'].each do |exe|
-    test "is in a rails application if #{exe} exists and contains APP_PATH" do
-      File.stubs(:exists?).with(exe).returns(true)
-      File.stubs(:read).with(exe).returns('APP_PATH')
-      assert Rails::AppRailsLoader.find_executable
-    end
+  ['bin', 'script'].each do |script_dir|
+    exe = "#{script_dir}/rails"
+
+    test "is not in a Rails application if #{exe} is not found in the current or parent directories" do
+      File.stubs(:exists?).with('bin/rails').returns(false)
+      File.stubs(:exists?).with('script/rails').returns(false)
 
-    test "is not in a rails application if #{exe} exists but doesn't contain APP_PATH" do
-      File.stubs(:exists?).with(exe).returns(true)
-      File.stubs(:read).with(exe).returns("railties #{exe}")
       assert !Rails::AppRailsLoader.exec_app_rails
     end
 
-    test "is in a rails application if parent directory has #{exe} containing APP_PATH" do
-      File.stubs(:exists?).with("/foo/bar/#{exe}").returns(false)
-      File.stubs(:exists?).with("/foo/#{exe}").returns(true)
-      File.stubs(:read).with("/foo/#{exe}").returns('APP_PATH')
-      assert_equal Rails::AppRailsLoader.find_executable_in_parent_path(Pathname.new("/foo/bar")), "/foo/#{exe}"
-    end
+    ['APP_PATH', 'ENGINE_PATH'].each do |keyword|
+      test "is in a Rails application if #{exe} exists and contains #{keyword}" do
+        write exe, keyword
 
-    test "is not in a rails application if at the root directory and doesn't have #{exe}" do
-      Pathname.any_instance.stubs(:root?).returns true
-      assert !Rails::AppRailsLoader.find_executable
-    end
+        expects_exec exe
+        Rails::AppRailsLoader.exec_app_rails
+      end
 
-    test "is in a rails engine if parent directory has #{exe} containing ENGINE_PATH" do
-      File.stubs(:exists?).with("/foo/bar/#{exe}").returns(false)
-      File.stubs(:exists?).with("/foo/#{exe}").returns(true)
-      File.stubs(:read).with("/foo/#{exe}").returns('ENGINE_PATH')
-      assert Rails::AppRailsLoader.find_executable_in_parent_path(Pathname.new("/foo/bar")), "/foo/#{exe}"
-    end
+      test "is not in a Rails application if #{exe} exists but doesn't contain #{keyword}" do
+        write exe
+
+        assert !Rails::AppRailsLoader.exec_app_rails
+      end
+
+      test "is in a rails application if parent directory has #{exe} containing #{keyword} and chdirs to the root directory" do
+        write "foo/bar/#{exe}"
+        write "foo/#{exe}", keyword
 
-    test "is in a rails engine if #{exe} exists containing ENGINE_PATH" do
-      File.stubs(:exists?).with(exe).returns(true)
-      File.stubs(:read).with(exe).returns('ENGINE_PATH')
-      assert Rails::AppRailsLoader.find_executable
+        Dir.chdir('foo/bar')
+
+        expects_exec exe
+        Rails::AppRailsLoader.exec_app_rails
+        assert_equal File.join(@tmp, 'foo'), Dir.pwd
+      end
     end
   end
+
+  teardown do
+    Dir.chdir(@cwd)
+    FileUtils.rm_rf(@tmp)
+  end
 end