Thumbs up for many reasons.
1) Low risk contract for the Cubs: One year and 4 million, not a lot invested there. If he gets hurt then you don't resign him next year, cut your ties with him and move on. If he does well then it will absolutely be worth the money, which can increase to around 7.5 mil with incentives.
2) Low risk for Kerry Wood: Kerry Wood wanted to be here with the Cubs. He has said in the past that he loves being a Cub, loves the city of Chicago, and is grateful that the Cubs drafted him, brought him through their system, stood by him through his injuries and rehab, and continue to support him to this day. The fans love him and still hope he will still live up to the hype. If he were to go elsewhere, say Boston or New York, he might have got more money and another year, but if he gets hurt or does not pitch well you know the fans will be all over him. Kerry wanted to stay in Chicago, the fans wanted him back, the team wanted him back, so this seemed like the best move for him.
3) He's now a relief pitcher: The days of Kerry Wood starting are all but over. The Cubs moved Ryan Dempster to the rotation and are set on their other four starters, meaning Wood is coming out of the pen. Wood will be in the running to be the closer. If not the closer then he will be one of the main setup men. You're not relying on him to throw 100+ pitches every five days, just one inning every other day. He has pitched out of the bullpen before, including all of last year, and he has had success doing so.
4) Who else would you get: Eric Gagne is the only other closer-type available in free agency. He's had recent arm problems and didn't look very good after he joined the Red Sox last year. If you didn't bring back Wood and you don't bother with Gagne, then the Cubs would be left to plug in a rookie. They have some rookies with decent arms, but to be honest I would rather have Wood out there than Kevin Hart or Angel Guzman, who have yet to prove themselves over a full season.
In conclusion, you might think Kerry Wood is overrated, and you might be right. By now I, as well as most Cubs fans, was expecting Wood to be a 20 game winner, a Cy Young contender, a 200 inning 200 K a season pitcher. Arm problems have derailed that version of Kerry Wood. However, Cubs fans and the Cubs organization have stuck by Wood as he has to both of them, and now Wood has a chance to remake his career. He won't be a 20 game winner, but if he is the closer and he can save 30+ games and help the Cubs get back to the playoffs, bringing Wood back would be worth it and then some.
PS> Kerry Wood would not be the first Cub to get back-to-back one year contracts. Mark Grace, my favorite Cub of all time, had several one-year contracts over his career. He loved the city, the fans, and the team so much he was willing to stay for what ever the Cubs were willing to give him for a year. When the team decided he was too old and wasn't worth a one-year deal, the Diamondbacks picked him up and he helped them win the 2001 World Series. I hope Grace comes back to us eventually, as an announcer or a coach.