We are wondering what role the CFACPR variable plays in the calculations. Our understanding of the assignment is that we compute the daily ratios for each stock in the S&P 500, then find the median ratio value for each stock for the year and select the 20 highest to invest in the next year. We then calculate our returns from investing in those 20 stocks for the year. Where exactly would the CFACPR variable come into play?

You do not COMPUTE the daily returns, you DOWNLOAD them useing RET or RETX. CFACPR is a factor which takes into account splits so you could calculate a split-adjusted price, but it does not include dividends. For that you need to use CRSP's return variable RET. It includes both splits, spinoffs, and dividends into the returns. RETX does the same but without dividends.