webpacker: Adding webpacker to existing project breaks the application

Hi, I’m trying to add webpacker to an existing rails 5.1 application. I don’t have anything non-standard at the moment. I’m running ruby 2.4 and rails 5.1 and am using turbolinks. The application has a few .js files in app/assets/javascripts, a few .scss files in app/assets/stylesheets and some images organized in subfolders in app/assets/images.

I’m including the javascript with javascript_include_tag (application.js just requires all the files in the directory), stylesheets with stylesheet_link_tag (application.scss just requires all the files in the directory) and all the images in html.erb templates with image_tag.

I added webpacker gem to Gemfile, ran bundle install and rails webpacker:install. Once I do this the app returns 500 upon every request. The issue is that the images that are loaded with image_tag are no longer found. I get the error pasted below. I tried commenting out the images but then the problem is with the javascript_include_tag with the same error.

ActionView::Template::Error (File to import not found or unreadable: outside. 
Load paths:
...

What did I do wrong? Shouldn’t the existing images from app/assets/images loaded with image_tag still be working? And same for javascript_include_tag…