IIRC you can still use the bayo even if you have an M203 on there. Yes, a gunsmith coulf thread the barrel end and then you could put on a flash supressor. Depending on the barrel diameter the barrel may have to be turned down on a lathe first before it can be threaded.
The difference in your rifle to current US production military M16A2's is that military barrels are skinny under the handguards (to save weight) and HBAR ahead of the handguards, they have bayo lugs, they have threaded barrels with flash suppressors, they fire semi-auto and 3 round burst. Also I don't know what colt is doing these days, but the trigger/hammer/take down pins may be a non-standard diameter, and you may have a block in the lower receiver.
For between $200 and $300 USD, you could simply get a new barrel that has the bayo lug, threaded muzzle with suppressor, skinny under the handguards, 5.56 chambering, and simply swap barrels. Don't know what gunsmiths and machinists charge, but for only a little bit more you could get a better result. Then sell the old barrel and get most of your money back anyway. Then you will probably save money instead of spending it all on machining.